TA : Forecasting and Planning

• By: Dr. Smita

Learning Objectives

After studying this chapter, you should be able to:

• Describe the workforce planning process.
• Discuss how an organization can predict its future business
activity.
• Describe how an organization can forecast its demand for
workers.
• Explain how to forecast the likely supply of available workers
from inside and outside the firm.
• Discuss how to develop action plans to address gaps between
labor supply and labor demand.
• Describe the staffing planning process.
Workforce Planning
• The availability of the talent needed to execute a desired
business strategy will be an influence whether or not that
strategy is ultimately successful.
• Workforce planning: the process of predicting an organization’s
future employment needs and the availability of current
employees and external hires to meet those employment needs
and execute the organization’s business strategy.
• Workforce planning is the foundation of strategic staffing
because it identifies and addresses future challenges to a firm’s
ability to get the right talent in place at the right time to execute
its business strategy.
Workforce Planning Process (1 of 2)
1. Identify the business strategy.
2. Articulate the firm’s talent philosophy and strategic staffing
decisions.
3. Conduct a workforce analysis.
4. Develop and implement action plans. Develop action plans to
address any gaps between labor demand and labor supply
forecasts.
• The action plans should be consistent with the firm’s talent philosophy,
and can include recruiting, retention, compensation, succession
management, and training and development.
• Action plans can be short-term or long-term, depending on the firm’s
needs and the predictability of the environment.
5. Monitor, evaluate, and revise the forecasts and action plans. As
the environment changes, forecasts and action plans may need to
change as well.
Workforce Planning Process (2 of 2)
Forecasting

• Given the uncertainty of forecasts, construct estimates as a

range, providing low, probable, and high estimates.
• Recalculate estimates as changes happen in the
organization’s internal and external environments and as the
firm’s assumptions and expectations change.
Forecasting Business Activity

An organization’s product demand directly affects its need

for labor
Locate reliable, high-quality information sources within and
outside of the organization to forecast business activity
Types of business activity forecasts:
• Seasonal
• Interest rate
• Currency exchange
• Competitors
• Industry and economic
• Others
Forecasting Labor Demand

It is a good idea to identify minimal as well as optimal staffing levels

when analyzing labor demand.
An organization’s demand for labor depends on its forecasted
business activity and its business needs, which depend on its
business strategy.
Business needs can include things like:
• Achieving the staffing levels necessary for generating a given amount of
revenue within a particular period of time (e.g., salesperson staffing
levels necessary to generate $5 million of revenue within 6 months)
• Increasing staffing levels to execute a growth strategy
• Decreasing staffing levels during a restructuring
• Obtaining the new talents needed to create new products or provide
different services
Ratio Analysis

Assumes that there is a relatively fixed ratio between the

number of employees needed and certain business metrics.
• Using historical patterns within the firm helps to establish a
reasonable range for these ratios.
• This process can be used for either justifying new positions or
demonstrating the need for layoffs.
Need consistent historical trends to calculate ratios.
Possible Ratios

• Production quantity to employees

• Revenue per employee
• Managers to employees
• Inventory levels to employees
• Number of customers or customer orders to employees-sales
ratio
• Labor costs to all production costs
• The percent utilization of production capacity to employees
Scatter Plots
Show graphically how two different variables (e.g., revenue and
staffing levels) are related.

If an area has a
population of 44,000 then
8 ambulance drivers
would be predicted to be
needed
Trend Analysis (1 of 2)

• Uses past employment patterns to predict future needs.

• For example, if a company has been growing five percent annually for
the last eight years, it might assume that it will experience the same five
percent annual growth for the next few years.
• Any employment trends that are likely to continue can be useful
in forecasting labor demand.
• Because so many factors can also affect staffing needs, including
competition, the economic environment, and changes in how
the company gets its work done (e.g., automation might
improve productivity), trend analysis is rarely used by itself in
making labor demand forecasts.
Trend Analysis (2 of 2)
Judgmental Forecasting

• Relies on the experience and insights of people in the organization to predict

future needs.
• Top-down: organizational leaders rely on their experience and knowledge of their
industry and company to make predictions about what future staffing levels will
need to be. Top managers’ estimates then become staffing goals for the lower
levels in the organization.
• In some cases, particularly when companies are facing financial difficulties or
restructuring, budgets may determine these headcount numbers.
• Bottom-up: uses the input of lower-level managers in estimating staffing
requirements. Based on supervisors’ understanding of the business strategy, each
level provides an estimate of their staffing needs to execute the strategy. The
estimates are consolidated and modified as they move up the organization’s
hierarchy until top management formalizes the company’s estimate of its future
staffing needs into staffing goals.
The Role of Judgment

• Because historical trends and relationships can change, it is

usually best to supplement the more mechanical ratio, scatter
plot, and trend forecasting methods with managerial judgment.
• The more mechanical methods can be used as a starting point
and managerial input then used to modify the estimates.
Return on Investment Analysis
• Estimate the return on investment from adding a new position based on the
costs and outcomes resulting from that new hire.
• First assign dollar values to the benefits you expect from a new hire for the
period of time most appropriate for the position and your organization.
• How much revenue during the period will be directly generated as a result of this
position?
• How much money per period will this position save your organization in terms of
increased efficiency, and how much value will it add in greater productivity,
quality, or customer service?
• Then compare this amount with the cost of adding the new hire.
• Compute the cost of hiring, including advertising the position, interviewing,
screening, travel, relocation, and training expenses.
• Add this to the compensation for the new position during the time period to get
your initial investment.
• Compare this amount with the value your company will gain to determine
the return on the investment of adding the new position.
Forecasting Labor Supply

• Combining current staffing levels with anticipated staffing gains

and losses results in an estimate of the supply of labor for the
target position at a certain point in the future.
• Anticipated gains and losses can be based on historical data
combined with managerial estimates of future changes.
• The external labor market consists of people who do not
currently work for a firm.
• A firm’s internal labor market consists of the firm’s current
employees.
Forecasting the Internal Labor Market

Estimate the competency levels and number of employees likely to be

working for the company at the end of the forecasting period.
To forecast internal talent resources for a position, subtract anticipated
losses from the number of employees in the target position at the
beginning of the forecasting period.
• Losses may be due to promotions, demotions, transfers, retirements,
resignations, etc. When workers are harder to find, more employees than
usual may leave the organization to pursue other opportunities than leave
during looser labor markets when jobs are less plentiful.
• Anticipated gains from transfers, promotions, and demotions are then added
to the internal labor supply forecast.
Transition Analysis (1 of 3)

• A quantitative technique used to analyze internal labor markets and

forecast internal labor supply.
• A simple but often effective technique for analyzing an organization’s
internal labor market, which can be useful in answering recruits’
questions about promotion paths and the likelihood of promotions as
well as in workforce planning.
• Can also forecast the number of people who currently work for the
organization likely to still be employed in various positions at some
point in the future.
• The analysis is best performed for a limited number of jobs at a time
to keep it easily interpretable.
Transition Analysis (2 of 3)
Transition Analysis (3 of 3)
Table 5-2 An Example of a Transition Probability Matrix
Transition Probabilities (2013–2014) Current (2014)
FTCSR PTCSR (4) SUP (5) MGR Exit (7) Number of
Job Category (1) Level (2) (3) (%) (%) (%) (6) (%) (%) Employees (8)
Full-Time Customer 1 40 10 10 0 40 400
Service
Representative
(FTCSR)
Part-Time Customer 1 20 50 5 0 25 150
Service
Representative
(PTCSR)
Supervisor (SUP) 2 5 0 85 5 5 75

Manager (MGR) 3 0 0 0 65 35 20
 Using the Transition Probability Matrix
Table 5-3 Forecasting Employees Using the Transition Probability Matrix
Forecasted Employees for 2015 Current (2014)
Number of
Employees
Job Category (1) Level (2) FTCSR (3) PTCSR (4) SUP (5) MGR (6) Exit (7) (8)
Full-Time Customer 1 160 40 40 0 160 400
Service
Representative
(FTCSR)
Part-Time 1 30 75 8 0 37 150
Customer Service
Representative
(PTCSR)
Supervisor (SUP) 2 4 0 64 4 3 75

Manager (MGR) 3 0 0 0 13 7 20

Forecast for 2015 blank 194 115 112 17 207 blank

blank blank 206 Deficit 35 Deficit 37 Surplus 3 Deficit Exits blank

Internal Labor Market Forecasting Methods
• Judgment
• Talent inventories: summarize each employee’s skills, competencies, and qualifications
• Replacement charts: visually shows each of the possible successors for a job and
summarizes their present performance, promotion readiness, and development needs
• Employee surveys to identify the potential for increased turnover in the future
• Labor supply chain management: The basic foundation of any supply chain model is to
have the right product, in the right volume, in the right place, at the right time, with the
right quality
• Businesses use multiple suppliers so that they can quickly
change and scale to meet changing business needs.
• Supply chain management principles of inventory management,
planning, and optimization can be easily applied to people.
• Software and services allow companies to match employees'
expertise and knowledge to business needs and deploy the
right people just as assets would be deployed in a supply chain.
Replacement Chart
Forecasting the External Labor Market

Organizations monitor the external labor market in two

ways.
• The first is through their own observations and experiences.
For example, are the quality and quantity of applicants
responding to job announcements improving or getting worse?
• The second way is by monitoring labor market statistics
generated by others.
• U.S. Bureau of Labor Statistics (BLS) and others
Resolving Labor Supply/Demand Gaps

• Action plans proactively address an anticipated surplus or

shortage of employees.
• Whether a shortage or surplus of applicants is the result of
temporary factors or whether it reflects a trend that is likely to
continue, is an important factor to understand, because
different staffing strategies are appropriate for each.
Temporary Talent Shortage

• Because higher salaries cost the organization more money throughout the
new hire’s tenure with the company, hiring inducements that last only as
long as the talent shortage does are often better.
• Companies often turn to more expensive recruiting methods such as search
firms, or lower their hiring standards so that more recruits are considered
qualified.
• Neither of these strategies is guaranteed to work
• More expensive recruiting methods may quickly drain a recruiting budget
without resulting in an acceptable hire
• Lowering hiring standards decreases the quality of the company’s workforce,
which may not be acceptable
• Options include offering hiring incentives such as sign-on bonuses and
retention bonuses such as stock options or cash to be paid after the
employee has successfully worked with the company for a certain period of
time.
Persistent Talent Shortage

If it is likely that a worker shortage will last a number of

years, an organization must:
• Reduce its demand for the talents that will be in short supply
• By increasing their use of automation and technology, and by
redesigning jobs so that fewer people with the desired talent are
needed.
• And/or increase the supply of the qualifications it needs
• This is not a fast or practical solution for most organizations.
Temporary Employee Surplus

• If slowdowns are cyclical or happen frequently, using temporary or

contingent workers who are the first to be let go when business slows
can help to provide a buffer around key permanent workers.
• Temporary layoffs may need to last more than six months to be cost-
effective due to severance costs, greater unemployment insurance
premiums, temporary productivity declines, and the rehiring and
retraining process.
• Losing the investments the organization has already made in hiring and
training the laid off workers can also be costly.
• Alternatives to layoffs include across-the-board salary cuts or a
reduction in work hours, or reallocating workers to expand other
areas of the business.
Permanent Employee Surplus

• Early retirement incentives, layoffs, and not filling vacated positions can
all reduce an employer’s headcount, but with a cost.
• Early retirement programs can result in the most skilled and productive
employees leaving the organization.
• Layoffs can damage workforce morale and hurt the firm’s reputation as an
employer.
• Not filling open positions can leave key positions in the organization vacant or
understaffed.
• Action plans to address a persistent employee surplus may also involve
reassignments, hiring freezes, and steering employees away from careers
in that position to reduce the need for future layoffs.
• Retraining employees to fill other jobs in the firm can help bring labor
supply and demand into balance.
Staffing Planning

The three questions that need to be answered are:

1. How many people should we recruit?
• Staffing yields: the proportion of applicants moving from one stage of
the hiring process to the next
• Hiring yields: the percent of applicants ultimately hired (also called
selection ratios)
2. What resources do we need?
• Workload-driven forecasting: based on historical data on the average
number of hires typically made per recruiter
• Staffing efficiency driven forecasting: the total cost associated with the
compensation of the newly hired employee
3. How much time will it take to hire?
• Continuous recruiting can shorten the hiring timeline
• Batch recruiting: recruiting a new applicant pool each time
Staffing Yields
Hiring Timeline
External Cost Per Hire

External cost per hire: six basic elements account for 90% of the
costs to hire to calculate the cost of external hiring:
1. Advertising expenses
2. Agency and search firm fees
3. Employee referral bonuses
4. Recruiter and applicant travel costs
5. Relocation costs
6. Company recruiter costs (prorated salary and benefits if the recruiter
performs duties other than staffing)
• Saratoga Institute adds an additional 10% to cover miscellaneous expenses
including testing, reference checking, hiring manager time, and administrative
support.
Internal Cost Per Hire

Internal cost per hire includes four elements:

1. Internal advertising costs
2. Travel and interview costs
3. Relocation costs
4. Internal recruiter costs
Discussion Questions (1 of 2)

• If forecasting is rarely exact, why should a firm bother

doing it?
• What labor force trends might influence a firm’s staffing
planning, in your opinion?
• How can contingent employees help an organization
prepare for anticipated surpluses or shortages of workers?
Discussion Questions (2 of 2)

If your boss asked you how investing more resources in

forecasting and planning could help the organization
compete better, what would you say?
What would happen if a firm did not engage in staffing
planning?
Case Study (1 of 2)
Sweet Tooth Inc. is experiencing growing demand for its new line of candy and needs
to add a new production line of 50 workers. You are the company’s newly hired vice
president of human resources. Your first task is to develop a staffing plan for this new
production line. The company’s historical staffing yields for its production line
positions are as follows:
• 20 percent of applicants are invited for interviews.
• 80 percent of interview invitations are accepted.
• 15 percent of the people interviewed are extended job offers.
• 50 percent of the people receiving job offers accept them.
• The company’s average recruiter can process 100 recruits during a recruiting drive.
• The company’s staffing timeline the last time it hired production line employees is
given in Figure 5-8.
Case Study (2 of 2)
Questions
1. How many people should Sweet Tooth recruit for its 50 new assembly-line jobs?
2. Using workload-driven forecasting, how many recruiters are needed for the staffing
effort?
3. How long will it take to staff the new production line?
Chern’s Case Assignment

a) Conduct a transition analysis.

b) Summarize the internal labor market and highlight any trends or
forecasted gaps.
c) Based on the transition probability matrix, calculate how many new full-
time sales associates should be hired externally.
d) Calculate the number of applicants needed to acquire the number of new
hires you forecasted.
e) Use multiple sources of data to describe the current and future labor
market for retail salespeople. If you forecast a gap, determine whether the
gap is temporary or permanent. Make some recommendations to address
the gap.