Ramstad: Why DigiKey made huge investment in northwestern Minnesota, despite slowing economy

THIEF RIVER FALLS, MINN. – There are too many patches of woods around this northwestern Minnesota town of 8,800 people to see a dramatic vista of one of the largest buildings in Minnesota.

But that’s OK. The real drama of DigiKey’s 2.2 million-square-foot product distribution center — twice the size of the Amazon fulfillment center in Shakopee — is that it’s there at all.

DigiKey confronted Minnesota’s biggest economic challenge — the low rates of population and workforce growth — before other companies and political leaders clued in on them.

A decade ago its leaders, including company founder and Thief River Falls native Ron Stordahl, felt the company was getting too large for the town and seriously considered moving. They examined Des Moines, Omaha and Sioux Falls and other Midwest cities with convenient shipping logistics and more people in the hiring pool.

“It was pretty much a given that it wouldn’t be here,” Dave Doherty, DigiKey’s president, told me as he recalled that time.

Then, in the biggest gamble of its 53-year history, leaders of the privately held company decided in 2018 to stay in Thief River Falls, construct the giant building and create a new way to sort millions of electronic parts for customers all around the globe.

Three years since that building opened, the bet has paid off. DigiKey continues to grow its sales, and its workforce of nearly 3,400 is more productive than ever. Even office workers train in “second skill” tasks to help out in the mega-warehouse.

The state Department of Employment and Economic Development projects the population in northwest Minnesota to grow 3.8% from now to 2035 while the workforce grows a mere 2.8% as aging baby boomers retire. Both are lower than comparable rates for the overall state in the 2020s, which I’ve often noted are the lowest in Minnesota history.

“So many companies are automating to squeeze costs and squeeze jobs out forever,” Doherty said. “Well, our challenge right now is there’s not enough labor to continue to support the growth.”

Stordahl, now in his 80s, remains the sole owner of DigiKey. He started the company in the 1970s after creating a digital keying device for ham radio operators communicating by Morse code. For its first 20 years, it remained a relatively small business, employing a few hundred people who distributed an ever-growing selection of electronic components at the start of the personal computer age.

Today, DigiKey distributes approximately 1% of the world’s electronic components — millions of microchips, circuit, cables, wires, and fans, plus the enclosures, panels and connectors to put them together.

The simultaneous rise of e-commerce and logistics companies played a huge role in DigiKey’s explosive growth. Today, FedEx, UPS and DHL all have staff on-site at DigiKey, running trucks and multiple flights a day directly to their own distribution hubs.

Between 20% and 25% of DigiKey’s business comes from people who are using internet search engines to find parts. Even the biggest names in electronics parts rely on DigiKey to reach customers they consider too small to sell to directly.

“In some cases, we’re an extension of the marketing team for some of the manufacturers,” said Tim Carroll, DigiKey’s vice president of e-commerce.

And some customers count on DigiKey as a just-in-time supplier of parts, or a consolidator of inventory. For them, DigiKey has converted lead time for parts into simply the time it takes to get a product from Thief River Falls to them.

As a result, said Doherty, “No longer does the location matter.”

That was one key insight playing a role in the 2018 decision to stay in Thief River Falls. Another was that moving away would have meant leaving behind the employees who knew how things worked.

DigiKey’s longtime warehouse, across the street and connected by skybridge to the new one, was a building originally owned by its next-door neighbor, Arctic Cat, maker of snowmobiles and other outdoor vehicles. DigiKey grew it to 600,000 square feet, but employees often felt cramped.

They invented new styles of bins and other ways to squeeze more parts into the space. When DigiKey people talked publicly about the tight fit, people around Thief River Falls offered to help. “We got people that said, ‘Oh I’ve got room in my dairy barn,’” Doherty said.

The solution, said Chris Lauer, DigiKey’s vice president of order fulfillment and logistics, rested in a fundamental change in the way DigiKey worked. For years, DigiKey’s pickers, the people who grab parts out of the warehouse to be sent to customers, walked up and down rows of inventory, reaching up and down for the parts, scanning them and bringing them back to a station to be sent along for final packaging.

In the new building, DigiKey makes the parts come to the pickers, as Amazon and many others do in their warehouses. Instead of racks that were about 8 feet high, DigiKey now stores parts in 35 rows of shelves that are 70-feet tall and stretch for hundreds of yards.

When DigiKey gets an order, its computers trigger an automated mover inside those racks to bring out a tray with the relevant part, then deliver it to one of nearly 200 pickers, who begin preparing it for shipment. The result: pickers process 25% more items per hour than in the old building.

There’s room to add more racks as sales grow and more inventory is needed, and there’s even space to extend the giant building.

“It’s a strategic advantage to be in one site with this amount of inventory,” said Chris Swenson, vice president of warehousing and distribution. The question, he said, is “How do we continue to maintain that growth with the supporting area of labor and the team we have? Because we can’t go to a different area.”