How many employees will you need in one, three or five years' time? What skills will be important to you and how will you meet those needs? Manpower forecasting is an essential part of human resources planning. Without it, you cannot assess the quality and quantity of people required or how you will attract those people given budget constraints, the state of the labor market and other conditions under which you operate.

Forecasting Techniques in Human Resource Planning

Human resource planning (HRP) is the process of forecasting how many people and what sort of people the business should have to meet current and future requirements. It combines three important activities:

  • Forecasting requirements based on the organizations' policies and strategies, for example, to meet growth ambitions, prevent labor shortages in key areas, cut costs or achieve staff mix and diversity ambitions.
  • Identifying and acquiring the right number of people with the right skills, either through external hiring or internal development.
  • Motivating these people to achieve high performance.

Businesses can use various tools and techniques to support these activities. They tend to fall into two areas: demand forecasting and supply forecasting.

What is Demand Forecasting?

Demand forecasting is the process of estimating the number of people required by the business over a specific period, and the skills and competencies they will need. The process starts by analyzing the longer-term business plan, which should give an idea of the company's anticipated activity levels and staffing budget. For instance, if the business is planning to set up a new regional office or create a new marketing team, then this is clearly going to affect manpower requirements.

What are Some Demand Forecasting Techniques?

A ratio-trend analysis is the quickest and simplest tool in the HR forecasting process. It involves analyzing current ratios between, say, the number of workers in the organization and the company's sales revenue, and then forecasting future ratios based on this data after making some allowance for changes anticipated by the strategic plan. For example, if the business reviewed its data and saw that every year 10 percent of staff resigned, 5 percent retired and 2 percent were dismissed, it could forecast a demand of 17 percent per year, just to maintain the same level of labor.

Work study techniques can be used to calculate how long specific tasks or operations should take and thus the amount of labor required. In a manufacturing company, for instance, you could perform a time-and-motion study to figure out how long tasks take to produce a specific volume of output, and from there calculate the hours of labor you would need to produce the output the business hopes to achieve. Businesses often combine work study techniques with ratio-trend analysis to calculate the number of workers needed.

Understanding Supply Forecasting

Supply forecasting measures the number of people with the right skills who are likely to be available from within and outside the organization. To perform a supply side analysis, the business needs to consider sources of supply from within the organization (transfers, promotions and other internal movements), sources of supply from outside the organization in the national and local labor markets and factors such as changes in hours and work conditions (for example, the number of people wishing to work part-time could materially impact the availability of labor).

Supply Forecasting Techniques

The most important technique for forecasting of human resource supply is succession, or "inflow versus outflow" analysis. This involves taking stock of the number of people you already have in various job categories and with specific skills within the organization. The human resources team can then review this analysis to see where obvious skills gaps are and what the impact of retirements, terminations, quits, promotions, hires and so on will be over the forecasting period.

Another HR forecasting method is the Markov Analysis. This measures the probability of an employee staying in her job over the forecasting period. The analysis is more sophisticated and usually done through a computer. However, the results are generally intuitive to decision-makers, showing, for example, that there's a 5 percent chance of a line worker being gone within 12 months, or a 20 percent chance of someone being promoted to manager. You can easily see which employees will remain loyal to the company with this analysis, and thus where manpower needs will arise.