Earlier this year, large electronic components distributor Digi-Key Electronics announced that longtime president and chief operating officer Mark Larson would step down as company president, passing the torch to fellow executive Dave Doherty on July 1. The leadership transition was in the works for nearly a year-and-a-half, and now Larson is a member of Digi-Key’s board of directors, serving alongside company founder Ron Stordahl, who brought Larson on board back in 1976.
Much has changed at Thief River Falls, Minn.-based Digi-Key and in the electronics supply chain over the last 40 years. We asked Larson to reflect on those changes in an interview this past June. He talked about Digi-Key’s early days and some of the landmark decisions that helped shape the company, as well as the driving forces behind electronics distribution and what it takes to best serve design engineers. From its humble beginnings as a one-man shop selling kits of parts to design hobbyists in 1972 to its prominent position as one of the largest distributors of electronic components in the world today, Digi-Key has evolved alongside its design engineering customer base and continues to do so.
Service has been the greatest change in the industry, according to Larson, who draws a stark comparison between the mail-order days of distribution catalog houses in the 1970s and today’s high-service model that is largely Internet-driven. Underneath it all is a drive to provide design engineers with the products they need, when they need them, with the ultimate goal of helping them do their jobs better, faster, and more efficiently, he says. Larson expanded on these and other issues in the following excerpts from our interview:
Describe Digi-Key’s early years and the vision founder Ron Stordahl had for the company.
Larson: Ron Stordahl started selling electronic parts in 1972 and I joined the business in 1976. In the early days, Ron was a graduate student at the University of Minnesota, and he was a very active ham radio enthusiast. While he was still in school, he put together a kit [of electronic parts] for sending Morse code, and he would sell these kits at ham radio fairs—the kit was a bag of parts and a circuit board, essentially. In putting together those kits he would go to different companies to buy the parts. He found that if he wanted a decent price, he had to buy 10,000 of this, 10,000 of that … He sold maybe a couple hundred of them, which meant that he had thousands of parts left over.
I think his vision was to figure out how he was going to get rid of all these parts. Ultimately, his idea was to advertise them in hobbyist magazines and other electronics publications. As it turned out, the parts didn’t sell too badly, so he started thinking that he should get more product to sell. At the time, National Semiconductor had digital clock modules they wanted to get rid of, so we started selling digital clock modules. It just evolved from there. We had a nice offering of product for the hobbyist—and it was all surplus; we didn’t have any [franchised distribution agreements].
When I entered the business in 1976, that’s really what it was. We were doing about $800,000 a year selling surplus from manufacturers or other businesses that had extra product. We were filling a need in the marketplace.
What was your view of distribution when you joined Digi-Key in 1976, and what was your vision for the company?
Larson: Well, it was interesting because my exposure to distribution was to the other catalog guys—now they’re all called high-service [companies], but at that time they wouldn’t have been called that. In the catalog business, the service levels were pretty low back then. And that’s because they typically didn’t stock much of the product they advertised, which meant the lead times were very long. Also, communication was poor, things were not shipped quickly, and so forth. I was aware of all that because I had bought electronic components from our competitors before I knew I was going to be in the business.
I joined the company as chief operating officer and I immediately saw some opportunities. When I looked at it, we had a hobbyist base but we were starting to see that some of those hobbyists were coming back to us to buy parts that would be sent to their workplaces. It turned out that many of them were product design engineers for manufacturing companies. That’s when I had kind of a “eureka” moment, and I told Ron that I thought we should get some franchises and become [an authorized distributor] so that we would have assurance of quality product and continuity of supply. When you’re selling surplus, neither of those factors could be relied upon. The only franchise that we had in 1976 was Panasonic. They had just gotten into the states with components, so the brand name was well known, but the components were new. We soon realized that we should expand to other lines, and having the Panasonic line kind of legitimized us. Of course, most suppliers didn’t want to talk to us at first because we were so small, but gradually, after two or three years, we started getting some franchises, we started advertising in the magazines of the day, and it grew from there.
Our role continued to evolve, mainly because we started getting more and more design engineers in our customer base. Today, the hobbyist is probably less than 1% of our sales, with electronic design engineers representing a high percentage of our business. For us, the change really came down to authorization. As we became authorized for more lines, we were able to get more product and we could develop more business, more customers, get leverage for more lines … it’s kind of a circular thing. If you take it to extremes, 40 years later we have probably got one of the nicest line cards in the industry. Today, we are authorized for about 650 or 700 manufacturers’ lines.
How has the distributor’s role, in general, evolved in the last 40 years?
Larson: I think the biggest change has been that distributors’ service levels to the design engineer have improved exponentially. If you go back about 40 years, a lot of the design engineers were relying on mail order, and it was [not a great business]; service was very spotty. The larger, traditional distributors were interested in serving design engineers only if the potential was high enough that they could end up with a nice production order. So, working within the context of their business model, it was tough to justify working with engineers from small companies, in particular. Digi-Key went in a different direction, aligning its service more with the LL Bean or Land’s End model, following the business-to-consumer catalogers. After several years, we put in a guarantee that said any order received by 3 p.m. would be guaranteed to ship the same day, and that we would stock any product that we advertised. Those two guarantees propelled our business forward. We eventually moved the guarantee to 8 o’clock at night and we guaranteed that we would ship 95% of our product from stock … That kind of service guarantee and consistent proficiency really allowed Digi-Key to grow much faster than its competition.
Of course, other distributors started looking at us and they didn’t want to be outplayed, so service levels have risen across the board. The one major factor that has changed in the last 40 years is that the design engineer can get service that is incredibly better than it was; there is really no comparison.
What has been your primary role in driving change at Digi-Key over the years?
Larson: From the beginning I was the COO, so I stepped in and took over the top management job. When I look back on it, I think that probably the most significant decision I made was to go with an authorized distribution model, combined with the decision to continue to advertise into the hobbyist market but really have our focus be with the professional design engineer. I think those two factors played a really big role. And of course, it took years; it was like watching grass grow as we incrementally added franchises one after the other. But each franchise that we added gave us a greater ability to add the next one and the next one, ultimately leading to the fantastic line card we have today.
In addition to that, I’m personally very operations driven so to me, although marketing of product was important, I knew that if we wanted design engineers to buy from us over and over again, we had to perform. We had to under-promise and over-perform. We continue to follow that path, because it allows you to meet or exceed expectations. This has given us a real strong following of engineers over a period of many years.
What do you see as distributors’ greatest strengths in aiding design engineers going forward?
Larson: It is really a matter of doing anything we can do to make the design engineer’s job easier and quicker, and anything that will simplify their life as they work under time pressure. It has come down to a situation in which you have to have the broadest product line, number one, and number two, have product available to ship quickly so that you maintain consistent, on-time delivery. After those issues, which are the basics of distribution, we get to the more exciting aspects of the business, such as design support. That can include everything from design tools to seminars to quick, two-minute online tutorials or longer, more comprehensive information that is made available in some type of real-time status that the design engineer can access—either online or in a live conversation. There are so many initiatives going on at any one time at Digi-Key, but certainly one of our greatest strengths is a combination of developing a Web site that is incredibly relevant and comprehensive in its offering and putting the people behind that Web site that offer the expertise and service customers require.
Speaking of design tools, Digi-Key has played a key role in this area with the addition of affordable engineering design tools, such as Mentor Graphics Designer Schematic and Designer Layout. How important are these tools, and how do you see this aspect of the distributors’ offering evolving over the next few years?
Larson: To some engineers this is incredibly relevant and other engineers are operating in an environment where they already have this type of support. It varies widely. Design alternatives that go from a very basic to reasonably sophisticated level are important to offer customers. At the same time, you have to have the basic building blocks of distribution in place first. There’s a tendency sometimes to be enamored of these leading-edge aspects of servicing the engineer while failing to look at the basic elements of service that are so critical underneath it. I believe that [Digi-Key] has both elements, but it’s a continuous work in progress. For example, we have never said, “Well, now we have a web site that is exactly the way we want it.” We have so many resources that are working on the web, but still we can’t see the end in sight for everything we want to do.
You handed the company reins to Dave Doherty on July 1, but you will continue in a different role on the company’s board of directors. How will this change affect Digi-Key, and what do you expect to contribute to the company moving forward?
Larson: I’ll be in the role of vice chairman of our board. The management transition for Digi-Key really began almost exactly 18 months ago, that’s why Dave took the role of executive vice president, a role we did not have before. That was the start of the transition. Although the event was July 1, in a sense that handoff has been occurring over the last 18 months. In a general sense, Dave wants to build on our strengths. There are areas where we feel there’s potential, that there’s still lots to be done. The company is very well positioned and I think we’re serving the engineer effectively, but there is still plenty of room for improvement. My role in particular over the next few months will be to see that the transition to the new management goes well and to assist Dave.
What do you see as the major issues affecting design engineers over the next few years, and why should they turn to authorized distributors when looking for the best products for their designs?
Larson: If I was a design engineer, I would work to develop relationships and source product and information from authorized distributors because the fact is, there is a lot of product out there that is not bona fide—product that has been brought into the country that is counterfeit. It can be very expensive if you end up designing with that product and have failures, and even worse if the relationship is started and you not only design and incorporate the product but end up with failures down the road.
That said, the relationship with the design engineer and the distributor is going to continue to change. It used to be that the engineer relied on an FAE [field application engineer] or sales guy to bring them a data book or get them samples or get them some information that would help them. Now that’s not necessary. We have a very sophisticated customer base. They are well educated, very sharp, they know the business well, they know the product well, and it’s only now and then that they need additional information—and it may be very specific to something they are doing that they haven’t had exposure to in the past. The relationship of the engineer to the distributor will continue to be very close, but in a much different way.
What is the outlook for Digi-Key over the next few years?
Larson: Digi-Key has the foundation for tremendous growth. We are expanding rapidly internationally and we’re working hard to produce the ultimate web site—not just a one-stop in terms of where you get product, but in terms of where you get information. I think the future is very bright. It’s a competitive world, of course, and that works to the benefit of anybody who is doing design work. Competition in the distribution landscape ultimately gives customers better service, better tools, better access to product. Really, the outlook is nothing but good.
Digi-Key was founded in 1972 in Thief River Falls, Minn. Mark Larson joined the company in 1976 as chief operating officer and served as president and COO until July 1, 2015. He is now vice chairman of the company’s board of directors.
Larson was inducted into the IDEA Hall of Fame in 2013 and into the Minnesota Business Hall of Fame in 2014. This year, he was awarded the Elektra European Electronic Industry Lifetime Achievement Award as well as the Electronic Components Industry Association’s highest honor, the Gail S. Carter Award, which pays tribute to Larson for his accomplishments and his contribution to the electronics industry. Digi-Key ranked 8th in the 2015 Top 50 Electronics Distributors report, published by Global Purchasing, a sister publication to Electronic Design.