Outlook 2011: Gale force winds of change

Change that initially appeared to be evolutionary has suddenly become revolutionary. In a very real sense, the winds of change that were once a gentle breeze have reached gale force velocity and the balance of power has been moved permanently. The internet has empowered the design engineer and the professional purchaser. They now have unfettered access to components, product data, application notes and on-line chats at their convenience. Their dependence on traditional distribution has been broken. Distribution models developed decades ago are reeling. Infrastructure that seemed vital in the 1980s and 1990s is seen as far less relevant – sometimes irrelevant – to a growing number of customers. In some cases, engineers and professional purchases actually view the historic infrastructure of traditional electronic distributors as an impediment to achieving the most cost effective and time effective means to conduct business. It's interesting to note that, although the economic meltdown traumatized almost all sectors of our industry and caused a sharp drop in sales, several basic industry trends continued unabated. In fact, the 'hostile' market conditions that inflicted the industry in late 2008 and most of 2009 served as a catalyst in driving them forward. There is every reason to believe that three of the more prominent trends will continue to reshape distribution over the next few years: 1. Relationship marketing continues to be sharply challenged by performance marketing. 2. Speed and efficiency are increasingly important in design and procurement. 3. Electronic component sourcing is rapidly becoming more globalised. Not all distributors recognise or choose to address these trends, but Digi-Key is responding aggressively. Its business model is clearly propelling rates of sales growth that far exceed those of the industry and I believe that any objective observer would agree that it is more that just responding. There is a belief that Digi-Key is tactically and strategically fuelling these trends. Let's look at Digi-Key's numbers for January to August 2010 compared to the same period in 2009. • Worldwide sales are more than 75% higher. • UK sales are 115% higher. • European sales are 142% higher. • Asia-Pacific sales are up 161%. Design engineers and professional purchasers vote with their money. Digi-Key's growth rates have not occurred by accident; it has thoughtfully developed a business model that anticipates the customer's needs and wants in 'new age' distribution. This has driven Digi-Key to become the fourth largest distributor of electronic components in North America and the sixth largest worldwide. Relationship Marketing implies that a purchase is based on interpersonal or business relationships. In the real world, although relationships alone are not typically the sole factor in making a business decision, they often have a strong impact on purchasing decisions and can skew a decision to the disadvantage of the purchaser. Historically, relationships have been based on interdependencies. For example, an engineer, out of necessity, depended on a distributor account representative for product data, access to prototype quantities and technical support. However, with the advent of the internet, this dependency has been broken. Now, engineers can access a far broader range of product data on components from hundreds of manufacturers on the web. Additionally, if an engineer needs prototype quantities, hundreds of thousands of components are available for off the shelf delivery. Technical support can be accessed 24/7 by phone, fax, web chat or e-mails with immediate responses. In addition, Digi-Key's Product Training Modules (PTMs) give the design engineers access to hundreds of tutorials on new products and innovative technologies. PTMs are training modules to which design engineers can refer on their schedule, at a time when they are most relevant and convenient. By the same token, a professional purchaser or buyer of components in production quantities was formerly forced to rely on a distributor sales representative for product availability, pricing, lead times, possible substitutions and tracking shipments. Today, this dependency is broken. Digi-Key's website gives the purchaser instant access to this information and far more. Digi-Key processes millions of quotes a year for volume purchasers. For purchasers of production quantities who require or desire a single point of contact, Digi-Key's Volume Business Division representatives are prepared to work with them on both daily sourcing issues as well as scheduled releases. With the dependency broken, Performance Marketing is rapidly replacing Relationship Marketing. The distributor that performs consistently is the one that earns the business. Speed and Efficiency continue to become increasingly important for design engineers and professional purchasers. Time to market has always been important, but never more important than today. How does Digi-Key play into this equation? • By stocking the broadest range of board level components for off-the-shelf delivery. • By shipping 99% of orders received by 8pm Central Time the same day. • By providing world-class supply chain support. • By offering competent technical support on simple to complex products/issues. • By resolving problems or issues quickly and fairly. The third major trend, Global Sourcing of Electronic Components, is probably the strongest and is supported by the move from Relationship Marketing to Performance Marketing, as well as the increasing pressure for speed and efficiency. Electronic components typically have a relatively high value to weight ratio that allows them to be shipped cost effectively from country to country and region to region throughout the world. Free trade agreements exist in most major markets, which aid worldwide sourcing. Additionally, UPS and FedEX deliver quickly around the world. Digi-Key is unique among major distributors because all orders processed are shipped from its Product Distribution Center in the US. This means it can stock inventory based on the aggregate usage from all regions and can, therefore, justify stocking the broadest range of board level components in the world. It can also justify stocking in great depth. This plays strongly to the advantage of Digi-Key's customers. Design engineers and professional purchasers of electronic components are the drivers of these trends; they are the people that define our business. How is Digi-Key doing? Let's 'follow the money'. In 2009, one of the worst business years in our industry, Digi-Key sales were down a mere 5.7%. During this same time period, our competitors on a worldwide scale were typically down two to three times this rate. Now, in 2010, the industry has experienced a sharp rebound in sales. All distributors are enjoying excellent sales growth, but preliminary numbers show Digi-Key is outperforming the market with rates of sales growth more than 1.7 times that of the industry. The internet has empowered the design engineer and the professional purchaser. Digi-Key's business model strengthens their ability to exercise this power. Mark Larson is president at Digi-Key