The Idiot Index And Dior Bags

The “Idiot Index,” a term popularized by Elon Musk, sheds light on hidden inefficiencies within business processes. It reveals the gap between the cost of a final product and the total cost of its basic components.

For instance, if a product costs $100 to produce but its components only amount to $5, a high Idiot Index indicates significant profit leakage in the supply chain. This suggests that inefficiencies in sourcing, production, or distribution are causing profit erosion. The higher the Idiot Index, the more urgent the need for corrective actions.

To address this, consider strategies such as renegotiating procurement terms for better component deals, re-evaluating manufacturing processes to cut costs, or bringing production in-house partially or entirely.

This explains Tesla’s manufacturing and sourcing strategy.

Here is an example of Idiot Index. The Dior’s $2800 bag costs just $57 to make!