Elon Musk's "Idiot Index" Explained

Elon Musk has this idea called the “Idiot Index.” It’s a measure of how much more the cost of a finished product is than the cost of its basic components

This is a good explaination of the "Idiot Index" by @SecretCFO on X. 

View Post Thread On X

Post 1

Best takeaway from the @elonmusk book is the ‘Idiot Index’.

Idiot Index = Cost of a part or finished product divided by cost of its component raw materials at commodity level.

Elon has his finance teams at Tesla and Spacex track the idiot index by component in every product.

And then attack the products first with the highest idiot index….

A fantastic way of seeking out inefficiency and operating leverage opportunities.

And not just inside the businesses themselves, but across the whole supply chain.

Applying first principles reasoning to manufacturing product costing, in one simple, universal metric.

It can be used at total product level, components, sub component, all the way down to the smallest unit level in the Bill of Materials.

It’s BRILLIANT.

Then if they can’t get the price they want from suppliers, they flip to making the components in house.

Whatever it takes to get the idiot index down.

Post 2

The point here is not about punching suppliers to make things cheaper.

It’s about using first principles to challenge deeply embedded norms or rules that load-in hidden cost.

Example: the latches used on the NASA Space Station doors were especially designed and cost $1,500.

When the spacex team were quoted $1,500 for a door latch, they figured out they could modify a regular bathroom stall latch for $30.

Manufacturing supply chains orient around norms and specifications. These then get built into bill of materials, standard costs, and ultimately prices.

Then it just gets accepted that a latch costs $1,500 because the atomic unit is thought to be the latch itself.

The idiot index says ‘fuck that’, let’s take this back to first principles on the materials. Then a high idiot index directs where the greatest opportunity is for process innovation or specification rationalization.

Elon knows he can only sell hundreds of millions of Tesla if he can innovate the variable cost down to make the cars affordable. Not rely on established supply chains.

Likewise if he is going to colonize Mars, he can’t do it paying $1,500 for a door latch.

It’s fascinating.

HE Pennypacker

23 Blog posts

Comments