Method of Forecasting for Human Resources part 1

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Hello friends.

Now, let’s talk about the “methods of forecasting”.

Well, the first one is, “Ratio analysis”.

The second method is, “Scatter plots”.

The 3^rd is, “Trend analysis”.

Fourth is, “Judgemental forecasting”. And,

Lastly, the 5^th one is, “Return on investment analysis”, which we also call ROI analysis.

Well, let’s dive into each method.

First of all, let’s talk about “Ratio analysis”.

Well, now, “assume that there is a relatively fixed ratio between the number of employees needed and certain business metrics” which helps in future predictions as well.

For example, “a certain number of employees are needed for achieving certain learning man-hours”. That becomes a business metric. And the ratio between the learning man-hours and the employees needed is consistent.

So, “using these historical patterns, you can establish a reasonable range for these ratios”. Moreover, “this process can be used for either creating new positions or in some cases demonstrating the need for layoffs too”.

But what’s more important is that you “need to have consistent historical trends to calculate the ratios”.

It should not be as if you are following a different trend in 2017, different numbers in 2018, different in 2019, different in 20, and different in 21 also. So, if your trend is going too much off the track, then you may not be able to do ratio analysis accurately.

Let me give an example of ratio analysis. Like:

– “Production to employees” ratio.

– “Revenue per employee” ratio.

– “Managers to employees’ ratio”.

– “Inventory levels to employees”

– “Number of customers or customer orders to employees”.

– “Labor costs to all production costs”. And, lastly,

– “The percent utilization of production capacity to employees”.

These are the few common ratios that are used in any organization and based on this, the forecasting is done. How to bring the new manpower? How to develop them? Or you can groom the internal talent pool for the next level of challenges or strategies.

So, the numbers of these ratios must be consistent so that your trend remains effective and ultimately, you get the accurate ratios.

Now, let’s move on to the second method which is “Scatter plots”.

Scatter plots basically show “how two different variables are related?”

If you have a closer look at the graphical representation shown on the screen then, you can see that “the relationship between the population served versus the number of ambulance drivers” is shown.

Well, if you have this kind of data available at a different juncture, then the data is plotted accordingly and an attempt has been made to connect the maximum dots.

Hence, accordingly, you have got a trend line here on the basis of which you can identify that suppose if you have to serve 43 thousand population, then how many ambulance drivers will you require. So, 8 drivers.

Well, this is a very interesting tool, on the basis of which you can make many decisions, you can also take many recruitment or layoff decisions on its basis.

But all the data you have here should be accurate. Let's see, how many drivers would be required if 11 thousand people need to be served? So according to the data here, 2 ambulance drivers are required.

You have to be very careful while predicting using scatter plots of how reliable and accurate your data is. (Are you getting it?)

Now, the third method is “trend analysis”.

In trend analysis, you basically “use past employment patterns to predict future needs”.

For example, “if a company has been growing 5% annually for the last eight years, it might assume that it will experience the same 5% annual growth for the next few years”. So now you can make your further predictions based on this particular benchmark. Okay.

Then, “any employment trends that are likely to continue can be used in future forecasting of the labor demand”.

But as you know, every factor does not exist as a standalone, there are many different factors associated with it. Okay.

Now, if you consider the staffing needs, then there is competition in the market, the largest among the talent but also in the organizations. How is the economic environment? Is it conducive where you can bring people into the organization by offering them a higher salary? And how are the companies getting their work done?

For instance, if automation is being included in any organization, then productivity is increasing in that organization.

Take an example. When any car is assembled, the first process that takes place inside it is stamping and blanking, where the parts of the cars are created from steel sheets. After that, an outer body is created from all those parts, by welding. (Right?)

Now think of 2 scenarios.

Consider the first scenario where people are bringing the whole car into one structure by high voltage welding.

Whereas in the other scenario robots are doing the same thing. Where will productivity be higher? Where are the chances of getting injured less? And in which scenario will you be able to use people effectively? It is a matter of thinking but where automation is used, you can engage people in new and innovative work to a great extent. You can engage them with new business strategies. (Do you agree?)

Trend analysis is generally not used so much because the labor demand fluctuates a lot and the external factors are not so consistent through which we can identify a trend. Okay.

Now, for example, this is a trend analysis of “domestically and internationally educated nurses”. Well, year after year, you are seeing that the count of internationally educated nurses is increasing and the count of domestically educated nurses is declining.

And they are converging on a particular number which is roughly around 110. Hence, 110 full-time nurses in the year 2008. If seen roughly, mid of 2007, and early 2008, the count of domestically educated and internationally educated nurses is the same.

After this, either this trend can increase or it can also remain saturated after this point. But we cannot predict much from this because of the external factors, how much conducive they are, and how much capable the nurses are to educate themselves internationally? And what challenges are we facing domestically? Well, we cannot judge that from this trend analysis. Either way, if some external environment changes, the same numbers can go up simultaneously. (I hope you are understanding the concept)

Due to volatility, trend analysis is not used in many labor forecasts.

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Now, the next method is “Judgemental forecasting”.

This purely “relies on the experience and the insights of people in the organization to predict future needs”.

The more you interact with the external and internal environment, the more accurately you will be able to give your judgment while forecasting certain things.

Now it has 2 methods of approach, "top-down approach" and "bottom-up approach".

In the top-down approach, “organizational leaders generally rely on their experience and knowledge of their industrial exposure” and the understanding they created while working in the company, based on this, the predictions are made about “what future staffing levels will be needed?”

The top managers then estimated how the staffing goals should be identified for the lower levels in the organization.

Then, in some cases, it has also been observed that when a company is dealing with a financial crisis or restructuring, at the time, the budgets may determine the headcount numbers that are required in the organization.

Well, at that time the role of the judgmental forecast is also involved because with which skill set the required headcount should be created and in what way it will become a trend in the future is starting to be identified here. okay.

Then, when we talk about the “bottom-up approach”, we “use the input of lower-level managers to estimate staffing requirements”, because they are closely related to their front-line workers.

Then, “based on the supervisor’s understanding of the business strategy, each level provides an estimate of their staffing needs to execute the strategy”.

Then, “all the estimates are combined, consolidated, and modified as they move up the organization’s hierarchy” and people’s experiences.

When these inputs go to the top management, they formalize the overall estimate for the future staffing needs and convert them into staffing goals. Okay.

Then, the last method is “ROI analysis” which is the return-on-investment analysis.

Basically, this analysis “estimates the return on investment from adding a new position based on the costs and outcomes resulting from that new hire”.

Well, first of all, you assign the monetary values to the benefits that you expect from a new hire. Furthermore, you analyze how much time duration you need for those benefits? And are you gaining those benefits at the appropriate time or not?

Therefore, you analyze, “How much revenue during the period will be directly generated as a result of this position?”

Also, you see, “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, you “compare this amount with the cost of adding the new hire”. Where you “compute the cost of hiring including advertising the position, interviewing, screening, travel, relocation and training expenses.”

Then, you “add this to the compensation for the new position during the time period to get your initial investment.”

Furthermore, you “compare this amount with the value your company will gain to determine the return on the investment”.

What is your company making overall, against the investment that you are making, which will tell you how much is the return on investment if you are creating a new position? (Got it?) ….

Now, let’s move ahead and talk about “Forecasting labor supply”.

So, when we combine the current staffing levels with the anticipating staffing gains and losses, we get an estimate so that we can forecast the labor supply for the target position at a certain point in the future. Okay.

Now, these “anticipated gains and losses can be based on historical data combined with managerial estimates of future changes”.

Mainly, “the external labor market consists of people who do not currently work for a firm”. However, “a firm’s internal labor market consists of the firm’s current employees”. Okay.

Now that we have understood the external and internal labor market, lets have a brief look at how the internal and external labor market is forecasted?

Now, “to forecast internal talent resources for a position”:

– First of all, “we will subtract anticipated losses from the number of employees in the target position at the beginning of the forecasting period”.

Now, suppose we have 10 candidates to fill up one position, and 4 candidates might leave our firm, because of either “promotions, demotions, transfers, retirements or resignations”. So, the average number of candidates we have is 6. Now, we have to see what kind of labor market do we have?

Now you will see that whatever the tighter labor markets are there where workers are harder to find, the people who are at that point of the time change their jobs very easily, as compared to when there are many jobs available in the market easily. Why? They are able to keep their upper hand and can easily take monetary and personal growth in their career. (Right?)

Then, “the anticipated gains for the positions from transfers, promotions, and demotions are added to the internal labor supply forecast”.

If you remember we calculated the average candidate which was 6 after subtracting, and if we feel that the anticipated gains we can get through transfer, promotions, or demotions are 2, then, 6 plus 2 is 8 candidates for that particular position. Okay.

Thank you.

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