Well, it really just depends on what you want the device to do, and how you want it to 'feel'. A rotary encoder is a great input device, it can be decoded by simple logic to give pulses for rotation, and a logic output for direction. If you simply wish for the device to output 'up' and 'down', then sceadwian's idea seems doable. Or you could try here:
**broken link removed**
Its SMT, and quite small, but its pretty much like the ones you get on the side of flashy mobile phones. Ie: simple a up/down switch, not strictly an 'encoder' at all. I believe farnell have a large number of different scroll wheels, but they might not be that cheap. I've used many different types, including ripping up an old ball mouse and using its encoder whells attached to pot shafts, for a smooth feel and excellent resolution (200 cycles per revolution).
Hope this helps.
Blueteeth