Adventures in the American Heartland

Author : Mike Green - Editor, EPDT

16 January 2024

Caption 1: Inside DigiKey’s Thief River Falls operation
Caption 1: Inside DigiKey’s Thief River Falls operation

Like any tech journalist, having time to actually learn about the companies we are dealing with is absolutely invaluable. Knowing a company’s ‘backstory’, the principles it was built on, the nature of its long-term objectives and what motivates its staff can provide us with the fundamental contextual aspects we need to be able to write better copy. So, I’ll always try to make the most of any opportunities that arise.

In the case of visiting the DigiKey headquarters, in Minnesota …well this trip was a long time in the making. I first got invited over back in about 2003/4 - by its then President Mark Larson. It never quite happened unfortunately, and when I moved out of editorial for an extended period, it looked like I might not ever make it there. Consequently, when I got a new invitation a few months back (not long after joining EPDT), I was quick to snap it up. 

Inception and thereafter 
When I’d met with Mr Larson at various tradeshows and other events some 20 years ago, DigiKey had already been in existence for the best part of 3 decades. It had been Larson’s compadre Ronald Stordahl that had founded the company back in the early 1970s. Not dissimilar to other well-known multi-billion dollar American tech companies, it had very humble beginnings - effectively started out in an ordinary household garage. A newly-graduated engineer, Stordahl was selling a Morse code generator he’d created to radio enthusiasts. This offered improved dot-dash signal clarity over conventional keyers. Though reasonably steady sales were witnessed, it soon became clear that there was a bigger prospective market for him to take on - by supplying component parts (like the ones he’d used to put together his digital keyers) to other SMEs. As the business started to flourish, Stordahl approached Larson (who’d known each other since both attending the University of Minnesota a few years earlier) about getting some space in the storage unit of his family firm.  

Despite still being relatively small in comparison to the big broadline distributors, by the early 2000s (when I became familiar with the company) DigiKey was starting to get a very sizeable share of voice - thanks to widespread editorial coverage, speaking opportunities, extensive advertising activity, plus participation in numerous general electronics and industry vertical exhibitions. It was growing rapidly as a result - and attaining impressive profit margins too. 

Though its competitors had all moved online by this stage, DigiKey was one of the few companies in the electronics sector who’d truly been able to commercially weaponize the Internet. It had been much more ambitious with its digital strategy and quicker than its rivals to ditch print catalogues in favour of web-based interaction. All this was proving to be a major advantage (one where it can still claim differentiation today). 

Having continued to make significant progress in the period since then, DigiKey has now reached a point where it generates annual revenues in excess of $5 billion, and is ranked amongst the world’s top 5 electronics distributors. It has an inventory of 15.3 million stock keeping units (SKUs) - not bad for a company that once just leased a corner of a small storage unit. 

A unique work ethic 
All the DigiKey executives that I spoke to during my trip over to Minnesota testified to the Midwestern character (and the can-do attitude that comes with it) being at the foundation of the company’s achievements. Whether it is the Scandinavian roots that most of the Thief River Falls populace can draw upon, giving them the inherent composure to keep calm in crisis situations, or the fact that living in a fairly remote part of the USA known for extreme weather conditions means they need to have the resourcefulness to deal with whatever gets thrown at them, it seems to work. 

As part of Digikey’s efforts to keep up with demand, there has been a long-standing tradition within the workforce that everyone spends time picking in the warehouse when help is needed. This stems back to the company’s beginnings, when the team (made up off just a handful of people) all had to be willing to do whatever needed doing - but has remained there ever since. 

No one is exempt from picking duty - with DigiKkey’s President, Dave Doherty (who’s made his way up through the higher echelons of the corporation over the last 16 years), and high-up mangers all happily getting stuck in. “I think seeing the President down here working alongside the rest of the staff gives a strong message of comradery and makes it clear that we're all in it together,” he says. “But it also means that you get an appreciation of what is going on at the grassroots level. You can learn first-hand where problems are, then think about more effective ways of doing things and what can be done to improve productivity.” 

Caption 2: Now up and running - the colossal PDCe facility
Caption 2: Now up and running - the colossal PDCe facility

Leveraging the web 
Having a superior online presence is vital to DigiKey’s business operations. In 2023, it got 2.1 million monthly visitors to its website, with an average of 2.4 million more  going to its various international websites each month. The company is constantly making investments in this area, and even has staff embedded at Google for this reason. As Tim Carroll, Global Head of Marketing & eCommerce, states; “We're the first ones to try anything new with Google. And if it works, great. If it doesn't work, we have all of Google behind us figuring out how to make it work. Sometimes it means we go backwards for a little while, but when it works, we're 6 or 9 months ahead of anybody else in the industry.”

Insightful online content is vital. It’s clearly not enough to provide specs for all the stocked products. There needs to be large quantities of supporting material to help website visitors make well-informed product selections. “When we were a catalogue distributor, we were agnostic to what someone came in to buy. We didn't want to prefer one part over another part,. oOr one supplier over another supplier. NBut now, customers have come to expect DigiKey to curate parts and tell us which parts other engineers like them are buying. Therefore, So we're starting to do more to influence and get customers to the best solutions rather than sitting back and saying - here's everything, you figure it out,” Carroll comments.

An evolving business model 
DigiKey now processes approximately 6.5 million orders daily. Its linecard features 2,800 different suppliers, with several hundred new ones and many thousands of products being added annually. “Onver average, we are now adding around 70,000 new products each year,” says Mike Slater, VP of Global Business Development - a seasoned supply chain sector veteran, who joined DigiKey after serving 20+ years with Arrow Electronics. A large amount of linecard expansion activity is currently being seen. “We're adding a lot of IoT based vendors, a lot of sensor type vendors. We're also adding some software vendors and security technology suppliers too,” he mentions. 

In addition, the corporation also acts as an very effective sales platform for a multitude of additional suppliers through its Marketplace initiative. This has enabled it to go beyond the component parts and development boards that have represented its main revenue stream until now. As a result, it can supplement these products with racks/enclosures, test instrumentation, industrial PCs, pneumatics, hydraulics, materials handling equipment and robots - all of which are shipped from the supplier partners themselves. As Brian Metelak, DigiKey’s Director of Global Applications Engineering, explains; “By placing products on Marketplace, manufacturers are able to expand their audience. More importantly, it means our customers have access to a whole new set of products. Looking back, we were noticing that many people were doing designs and would get say 90% of what they needed from us. With Marketplace, we are now able to fill in a lot of the remaining gaps, so they can conveniently get everything from one source.”
The initiative is helping DigiKey to address sectors that it wouldn’t have been able to in the past, such as automation. “With automation, there can be large pieces of equipment involved, so storing them at a central location and shipping them from there would be impractical, as well as damaging for the environment. Marketplace makes things much simpler, with such items coming direct from the supplier,” Metelak concludes.

Logistical challenges
Having kept on growing its customer base, its list of suppliers and the products it stocks, DigiKey had to face the company’s operational parameters outgrowing what the facility in Thief River Falls could cope with. It would mean that some crucial decisions (with far-reaching implications) would need to be made about the distribution company’s future. 

Brought in from UPS, having previously been in the US Airforce before that, Chris Lauer is DigiKey’s VP of Order Fulfilment. As he explains; “We had gotten to a point about 7-8 years ago, where we had to look at making changes. Our old system was designed to deal with 25,000 orders per day. We’d brought it to about 30,000 orders per day, through sheer tenacity and a lot of hard work, but we knew we had to grow beyond that.” Ramping up the operation was going to be unavoidable if rising customer demands were going to be met. “The big question was - where were we going to grow?” he continues. “Would it be here, or in some major metropolitan area instead?” 
It had been Doherty, as President, that had to struggle the most with what was the best tactic to take. “Though we looked at places like Omaha, Nebraska, and Des Moines, Iowa, which are good salt of the Earth, Midwestern cities where people would have shared a lot of the same values as us, Thief River Falls is really the heartbeat of DigiKey, with many years of blood, sweat and tears behind what has been achieved here.” Also, Doherty points out, that it wouldn’t have been right “if we were 400 miles away trying to create a new labour pool and telling folks back in Thief River Falls that we need you to bust your butts, but by the way, your jobs aren’t going to be there a year from now.” 

The judgement call was made to enlarge at the Thief River Falls site, rather than relocating. This meant that the company could benefit from the proven, loyal and conscientious staff situated there and the strong working culture that was already in place. “You don't exactly have an unlimited pool of people here, but the people you have are really the right ones, and that’s what matters most,” Lauer notes. At the same time, however, it brought certain challenges with it - in terms of logistics, talent acquisition, etc. 

Though the core supply chain elements of the corporation will remain where it is, to alleviate human resource challenges, Doherty and his team are looking at possible hubs for functions like IT, marketing, customer service, etc. These could be placed in locations that have access to plenty of relevant candidates for such jobs, thereby making recruitment easier - and alleviating the pressure placed on Thief River Falls and the surrounding area.    

Caption 3: The exterior of the Knapp OSR Shuttle system
Caption 3: The exterior of the Knapp OSR Shuttle system

The beginning of a new era
In the spring of 2018, construction of the Product Distribution Centre expansion (PDCe) began. This would be situated next to (though very quickly completely dwarfing) the existing Brooks distribution facility. It would allow a trebling of DigiKey’s order fulfilment capacity, giving the company huge scope for growth in the decades to come. 

The PDCe represents a titanic financial outlay by DigiKey, costing a staggering total of $400 million to complete. The new facility covers 2.2 million square feet - which means that a fleet of around 30 Boeing 747s could comfortably fit into it. 

Central to the PDCe is the large-scale Knapp Shuttle order storage and retrieval (OSR), which is supported by a multifaceted Manhattan operations management software installation. The goods-to-person delivery system already has the capacity to store over 1 million SKUs, with provision to increase this still further as demands dictate.

At first, DigiKey set up a pilot system at its site in Fargo, with 25 shuttles and 15,000 tray locations. This allowed thorough vetting, and the opportunity to quantify the efficiency gains that could be realised, before embarking on the installation at Thief River Falls.    

Once the PDCe went into operation, it was a matter of scaling up its output, and ironing out any problems. “It hasn't been an easy journey,” Lauer admits. “We’ve had to put ceaseless effort into it.” Having successfully dealt with the bugs in the system, over 80,000 details are being shipped out of the PDCe on a daily basis (and the older Brooks facility is turning into a case reserve facility supporting the new warehouse with additional inventory). The aim is to get this up to 170,000 details per day by 2029, with everyone putting in extra hours to get the volume levels up. 

As well as greater reliance on automation, the PDCe benefits from workflow improvements, too. Rather than dedicated staff taking care of picking and then having to pass everything over to other staff to carry out packing, the new streamlined approach allows picking and packing functions to be undertaken in combination. The goal is for the PDCe operation to attain 99.85% on time shipping. “We are not there right now, but we are determined to get back to that very soon,” states Lauer. 

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