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CHAPTER 4 The HR Forecasting Process Chapter Learning Outcomes After reading this chapter, you should be able to: • Understand what HR forecasting is, and its strategic importance to the firm. • Understand the value of human capital to the firm and discuss the difference between generic human capital and firm-specific human capital. • Discuss the differences between stocks and flows of human capital and comprehend the implications that stocks and flows have for HR planning. • Understand the rationale for giving special attention to specialist/technical workers, managers, recruits, and designated groups in the HR forecasting process. • Comprehend the forecasting process in general, and the categories of forecasting methods. • Outline the environmental and organizational factors affecting HR forecasting. Chapter Summary This chapter examines a wide variety of aspects associated with human resources forecasting. The advantages of instituting effective forecasting procedures include reducing the costs of HR, increasing the flexibility of the organization, ensuring a close link to the process of business forecasting, and ensuring that the requirements of the organization take precedence over other issues. Some groups—executives or specialist/technical personnel, especially those with in-demand critical skills, for example—attract special attention in the HR demand and supply reconciliation process. Both environmental and organizational factors have tremendous impact on various forecasting procedures, and many of these factors have to be addressed explicitly in HR forecasting procedures. The various stages associated with the HR forecasting process are determining the demand, ascertaining the supply, determining net HR requirements using formulas, and instituting the program. Finally, the policy implications of reconciling HR demand and supply, HR shortage or surplus, and various programs that may be instituted by organizations to address these are discussed. The next two chapters are devoted to an examination of specific techniques used by organizations to calculate HR demand and supply. Chapter 5 presents specific techniques employed by organizations to derive HR demand forecasts, while Chapter 6 focuses on HR supply forecasts. Class Outline Instructor’s Teaching Notes Students’ Learning Activities ¬¬ What is HR forecasting? Determining the net requirements for human capital by assessing the demand for and supply of human resources now and in the future. The Strategic Importance of HR Forecasting Read the descriptions of the HR forecasting methods and highlight some of the key considerations when forecasting. 1. Reducing HR costs. • Focuses on the organization’s current job-related knowledge, skills, abilities, and other characteristics and those desired in the workforce in the future. • Organizations are less likely to react to unexpected developments in the internal or external labour markets. KSAOs: the knowledge, skills, abilities, and other characteristics necessary for a person to perform well in a job. Also referred to as job specifications, KSAOs are derived from job analysis. 2. Increasing Organizational Flexibility HR gap: a shortage of human capital such that the organization is unable to meet its current or forecasted human capital requirements. HR surplus: a situation in which the organization has more human capital than it requires in order to meet its current or forecasted requirements. HR shortage: when the forecasted demand requirements cannot be satisfied solely by use of the current internal workforce supply of workers. 3. Ensuring a close linkage to the macro business forecasting process. • Using organizational objectives from production, market share, and profitability, HR analyzes their feasibility with respect to time, cost, and resource allocation. 4. Ensuring that organizational requirements take precedence over issues of resource constraints and scarcity. Human resources demand: the organization’s projected requirements for human capital. Human resources supply: the source of human capital to meet demand requirements, obtained either internally (current members of the organization’s workforce) or from external agencies. The Value of Human Capital to the Firm Generic human capital: the competencies, knowledge, skills, and abilities that are held by individual employees and that are useful to the firm. Firm-specific human capital: the competencies, knowledge, skills, and abilities that employees possess based on their tacit knowledge and learned from experience and through mentorship in the organization. Human Capital Stock and Flows Human capital stock: the amount of any specific form of human capital that is available to the firm at any given time. Human capital flow: the change in the stock of human capital over time. Factors that affect the flow of human capital including terminations, promotions, lateral movements, and demotions. The Forecasting Process: 1. Determine the staffing needs by skills, skill levels, or jobs. 2. Perform the analysis to determine the number of required employees. 3. Create a budget to determine the number of required employees. 4. Put HR programs and policies into place to ensure that the demand and supply requirements are met and track the results. Forecasting Methods: 1. Survey the business line for its anticipated needs. 2. Norm-based rules—this is a very common method of forecasting. 3. Time series and regression-based models. 4. Mathematical and economic models. 5. Qualitative models. Key Human Capital Analyses Conducted by HR Forecasters Strategic Forecasting 1. Specialist/technical/professional workers are employees with trade qualifications that are in high demand or that require lengthy preparatory training for attaining competency. 2. Employment equity–designated group memberships: People of Aboriginal descent, women, persons with disabilities, members of visible minorities. 3. Managers and executives: Executives such as the CEO, president, vice-president, and other managers. 4. Recruits: New employees can bring insight into how competitors structure and operate their business. Demand forecasting: the process of determining the organization’s requirement for specific forms of human capital. Supply forecasting: the process of determining the source(s) of human capital to satisfy the organization’s demand. Environmental and Organizational Factors Affecting HR Forecasting HR Forecasting Time Horizons 1. Current forecast: used to meet immediate operational needs. 2. Short-run forecast: from the current forecast and for the next 1 to 2 years. 3. Medium forecast: for 2 to 5 years into the future. 4. Long-run forecast: extends 5 or more years ahead of the current operational period. Prediction: a single numerical estimate of HR requirements associated with a specific time horizon and set of assumptions. Projection: several HR estimates based on a variety of assumptions. Envelope: the range of plausible values of a prediction based on a given set of assumptions. Scenarios: proposed sequence of events with their own set of assumptions and associated program details. Contingency plans: plans to be implemented when severe, unanticipated changes to organizational or environmental factors completely negate the usefulness of the existing HR forecasting predictions or projections. Institute HR Programs Job sharing: when two or more employees perform the duties of one full-time position, sharing work activities on a part-time basis. Attrition: the process of reducing an HR surplus by allowing the size of the workforce to decline naturally from the normal pattern of losses associated with retirements, deaths, and voluntary turnover. Review “Workforce Planning in Canada” in the chapter opening. Ask Students: What are some of the overall market factors that contribute to organizations doing poorly with HR planning? Ans: • Some jobs are increasing such as those related to health care and online services. • Automation is making some jobs redundant. • Many baby boomers are reaching retirement age; however, many are not retiring. See HR Planning Notebook 4.1—The Skills Necessary for Effective Planning. Skills can generally be categorized as one of the following: 1. Communication skills 2. Quantitative skills 3. Strategic skills 4. Process management skills Review HR Planning Today 4.1—Strategic Planning at Starbucks • Starbucks is involved in the community including helping youth, military veterans, and their families find meaningful career paths. • Builds stores using local women and ethnically owned contractors and vendors. • Using analyses can help to ensure that the top decision makers in the organization: 1. Are aware of key HR issues and constraints. 2. Ensure that the HR objectives are closely aligned with the organization’s operational business objectives. Ask Students: 1. Why is it important for organizations to identify their requirements for personnel in the future? 2. What happens if forecasting does not occur? Ans. The company will not have the right staff at the right time in the right jobs. Additional questions include: • What is the impact of possible major emergencies on HR planning? • What are some of the responsibilities of emergency managers? • What are some of the factors affecting the forecast for emergency personnel? • How are HR planners contributing to the ongoing development of emergency management as a profession? Ans. These are situations when severe changes in the organization or the environment change, making predictions for forecasting invalid (e. g., Nestle bottled water controversy or the changing flavours of Coca Cola). Ask Students: Why do many organizations ignore the planning functions required for developing a successful workforce? Ans. • Lack of knowledge. • Expectation that circumstances will change. • Fast paced work environment is often focused on short-term goals, not long-term planning. Learning Activity Ask Students: Review specific sectors such as education, manufacturing, health, or policing to determine the forecast expected for key personnel such as university professors, physicians, nurses, tool and die makers, police, and so on. Ask Students: What is HR demand and what is HR supply? Ans. Human resources demand: the organization’s projected requirement for human resources. Human resources supply: the sources of workers to meet demand requirements, obtained either internally (members of the organization’s workforce) or from external agencies. See HR Planning Today 4.2—Cutting-edge Canadian HRM: Sapient Canada—Aligning Culture and Core Values with Key HR Processes Learning Activity Recruiting trainees externally is a major area of relevance to students who are seeking a career in HRM. Have students break into groups of four to discuss the advantages and disadvantages of recruiting trainees externally into an organization. Review HR Planning Today 4.3—Forecasting Job Requirements Versus Task Requirements Who Are the Experts Who Can Help with Forecasting? • Government • Academic researchers • Schools • Business associations • Unions • Conference Board of Canada • Economic Development Offices Review HR Planning Notebook 4.2—Human Capital Forecasting at the Macro Level Ask Students to review the organizational and environmental factors. Have the class generate internal and external factors that influence HR supply and HR demand for specific businesses in various industries. Note whether the factors change if the industry changes. Ans. Organizational Factors • Corporate mission, strategic goals. • Operational goals, production budgets. • HR policies. • Organizational structure, restructuring. • Worker KSAOs, competencies, expectation. • HRM level of development. • Organizational culture, climate, job satisfaction, communications. • Job analysis: workforce coverage, current data. Environmental Factors • Economic situation • Labour markets and unions • Government laws and regulations • Industry and product life cycles • Technological changes • Competitor labour usage • Global market for skilled labour • Demographic changes • Weather if business is dependent on it Review HR Planning Today 4.3—Forecasting Job Requirements Versus Task Requirements Ask Students: What effect does the retirement age of baby boomers (not a mandatory age, just the usual time for those who choose to retire) have on the workforce? Ans. Boomers are staying in the workforce due in some cases to low savings, better health and life expectancy, higher education, and the return of older children to live with them. See HR Planning Notebook 4.3—Are Complex Forecasting Better than Simple Ones? Learning Activity Read HR Planning Notebook 4.4—Categorizing Forecasting Models. Forecasting models can generally be categorized as one of the following: 1. Time-series 2. Cause-and-effect 3. Judgmental Figure 4.1—Projected Average and Envelope of Employees Required for Engine Production. Review HR Planning Notebook 4.4— Categorizing Forecasting Models. Review HR Planning Today 4.4—Planning in the Health Sector. • A skills shortage for mental and physical health care, community care, and home care for Canada’s population. • The population is increasing globally. • High turnover for young health care workers. • Two-thirds of the workforce comprises baby boomers; therefore, there may be large losses eventually due to retirements and disability leaves. Learning Activity Divide students into groups of four to have them examine which HR programs can be instituted to either address an HR surplus or an HR shortage. Review HR Planning Today 4.2—Cutting-Edge Canadian HRM: Sapient Canada—Aligning Culture and Core Values with Key HR Processes. See HR Planning Notebook 4.5—Tips on Tuning Up Your HR Forecasting Models 1. A key problem for HR forecasting is the dilemma between simple, easy-to-use HR processes, and the multitude of causal factors that affect HR supply and demand. 2. The issue of data collection time intervals should be considered. 3. Researchers investigating HR forecasting found that frequent feedback of forecasting reduced problems from time lags. 4. HR forecasting may seem daunting to many small companies. CHAPTER 5 Determining HR Demand Chapter Learning Outcomes After reading this chapter, you should be able to: • Understand the importance of demand forecasting in the HR planning process. • Recognize the linkages between the HR plan, labour demand forecasting techniques, and the subsequent supply stage. • Compare and contrast the advantages and disadvantages of various demand forecasting techniques including quantitative, qualitative, and blended techniques. Chapter Summary Chapter 5 presents specific techniques employed by organizations to derive HR demand forecasts, while Chapter 6 focuses on HR supply forecasts, and Chapter 7 addresses succession management, which involves determining which current workers can be trained and promoted for future roles. Specific techniques associated with the first elements of HR forecasting are examined: the calculation of demand. In Chapter 6 specific tools are used to determine employee supply. The sources of labour supply derive either from the current organization (internal workforce) or from the external environment (hiring). Estimates of the demand for labour in Canada have become unclear due to factors affecting the economy. By 2030, when the youngest baby boomers will reach the age of 65, researchers will have a better understanding of how many workers will retire at the traditional age of 65 . The reasons many work longer include life expectancy increases; better health; lower savings, and higher educations. At the same time, workforce automation has reduced demand for labour. Other current trends are shifts to self-employment and the sharing economy. Examples are working for Uber, food delivery, and crowd funding. Class Outline Instructor’s Teaching Notes Students’ Learning Activities Increase in uncertainty around the demand for labour in Canada Forecasting Demand • Organizations needing human capital are affected by their strategic and operational requirements. • It is important to know how a job meets the needs of the organization and how it interacts with other jobs. • For example, car companies building electric vehicles (e.g., Ford, Mercedes) must consider factors such as the technology they will use, access to charging stations, and the features consumers will need. • Two methods of forecasting needs for human capital are quantitative and qualitative. Certainty in Forecasting Volume and Complexity of Available Data Quantitative Methods Trend/Ratio Analysis Trend analysis: a forecasting method that extrapolates from historical organizational indices. Ratio analysis: a quantitative method of projecting HR demand by analyzing the historical relationship between an operational index and the number of employees required. Steps to Conducting an Effective Ratio Analysis: 1. Select the appropriate business/operational index. 2. Track the business index over time. 3. Track the workforce size over time. 4. Calculate the average ratio of the operational index to the workforce size. 5. Calculate the forecasted demand for labour. Time Series Models Regression Analysis Pre-supposes the existence of a relationship or a predictor between one or more independent (causal or predictor) variables, which are predicted to affect the dependent (criterion) variable―in this instance, future HR demands for human capital (i.e., number of employees). Y = A + BX Y = Dependent variable (e.g., HR demand or the number of personnel required) A = Constant (Y intercept) B = Slope of linear relationship between X and Y X = Independent variable (e.g., level of sales, production output) Equation for the Trendline Employees 27.3 + (1.3. × production) If extrapolating that 1.3 more employees will be needed, the 27.3 number represents the intercept point on the graph where the predictor is zero. If looking at employees needed to increase production to 200 motorcycles, use: Employees 27.3 + (1.3. × 200 motorcycles) Therefore, if you want to produce 200 motorcycles you will need 27.3 + 260 + 287 If wanting to use sales data in the calculation, one would use: Employees 19.82 + (0.97 × Production) + (.22 × Sales) Structural equation modelling: a statistical technique that permits the testing of multiple relationships simultaneously in a theoretically derived model. Deals with many outcome variables in a single SEM Model. Structural Equation Modelling Qualitative Forecasting Techniques Management Survey Scenario planning: a method for imagining future possible organizational states and resulting capabilities, activities, or strategies that are necessary to be successful in those future states. Delphi Technique • Named after Greek oracle at Delphi. • Developed by N. C. Dalkey and his associates at the Rand Corporation. • Experts do not meet face-to-face. • Each questionnaire gets more specific. • A project coordinator canvasses the experts individually for their input. • Both Delphi and nominal are processes for estimating using known public figures, not a company’s own numbers. Steps in the Delphi Technique 1. Define and refine the issue or question. 2. Identify the experts, terms, and time horizon. 3. Orient the experts. 4. Issue the first-round questionnaire. 5. Issue the first-round questionnaire summary and the second round of questionnaires. 6. Continue issuing questionnaires. Direct managerial input is the most commonly used method for determining workforce requirements. Using experts to arrive at a numerical estimate for future labour demand is considered to be a qualitative process for determining future labour requirements. It is a detailed process of stating assumptions, considering potential organizational and environmental changes, and deriving a rationale to support the numerical estimate. Disadvantages of the Delphi technique: 1. Time and costs. 2. Results cannot be validated statistically. Problems of Individual Experts • Personalities of experts including shyness or job status. • Communication problems. • Dominance and groupthink. • If criteria for experts is not specific, wrong experts can be selected. Nominal Group Technique (NGT) Is long-run forecasting technique utilizing expert assessments. • Group meets face-to-face. • Expert forecast determined by a secret vote of all group members. • Resulting demand estimate is considered to be the property of the entire group. General Process 1. Propose the forecasting question about the future of the firm or environment. 2. Generate a list of factors that are likely to influence the outcome in question. It is helpful to do a SWOT analysis (strengths, weaknesses, opportunities, threats). 3. Sort the factors into naturally occurring groups and rank their importance. 4. Select the two factors that are likely to have the strongest and most unpredictable impact. Create four quadrants from extreme negative to extreme positive on the X axis and from extreme low to high on the Y axis. 5. Name and describe each of the four quadrants. 6. Suggest the skills, competencies, and other organizational requirements. 7. Generate a demand forecast necessary to fulfill firm’s requirements. Benefits • Often used to develop organizational strategy. • No limit to the number of possible scenarios. • Each scenario has its own assumptions, so this results in a different estimate of staffing for each action. Typical methods used to collect data are: • Interviews • Questionnaires • Surveys • Telephone conference calls HR Budgets/Staffing Tables HR budgets: quantitative, operational, or short-run demand estimates that contain the number and types of jobs required by the organization as a whole, and for each sub-unit, division, or department. HR budgets are prepared by the staff in conjunction with line managers. Staffing table: total HR demand requirement for operational or short-run time periods. Combining Quantitative and Qualitative Methods Both can be used to test reliability of the forecast. Simulation A blend of qualitative and quantitative modelling that incorporates a set of assumptions about relationships among variables in a mathematical algorithm. Simulation can simultaneously model demand and supply and is a useful tool for testing the impact of assumption on the outcome of the mode. Steps for Simulation: 1. Using qualitative methods, collect relevant variables. This can include interviews, focus groups, Delphi, or NGT to collect the information. 2. Describe how these variables interact by developing a process model to map the relationships between variables. 3. Use simulation software and develop the algorithms to estimate the model. 4. Test the model using historical data. 5. Different assumptions can be easily tested by inputting new scenarios and running the simulation again. Seven Steps in Nominal Group Technique 1. Define and refine the issue or question and relevant time horizon. 2. Identify expertise, terms, horizons. 3. Orient the experts. 4. Issue the first-round questionnaires. 5. Issue the first-round questionnaires summary and the second-round questionnaires. 6. Continue issuing questionnaires. 7. Vote secretly to determine expert demand assessment. • Assumptions start at the macro level, e.g., economy, technology changes. • Models can also include supply-related variables, i.e., time required for training • Use requires skills in math and logistics. • Simulation has advantages over regression and trend-based models for non-linear dependencies, e.g., revenues or production. Review the chapter-opening vignette “Increase in Uncertainty Around the Demand for Labour in Canada.” The Canadian economy is affected by conflicting forces. Ask Students: What are some of these? Ans. The youngest baby boomers are approaching retirement but many are staying in the workforce due to low savings, better health and life expectancy, and higher levels of education. Figure 5.1—Using Trend Analysis to Predict Future Requirements. See HR Planning Notebook 5.1—Ratio Analysis, for an example of how this forecasting technique is used at Puslinch Pottery. Review Figure 5.2A —Scatterplot. Apply this forecasting method for optimistic, most likely, and adverse sales forecasts. Review HR Planning Notebook 5.2—Time Series Analysis Puslinch Pottery. Figure 5.2A— Scatterplot. Figure 5.2B—Trendline. Figure 5.3—Three-Dimensional Regression Plane. Figure 5.4A—Shared Variability Between Predictor and Criterion. Figure 5.4B—Increase in Shared Variability Using More Predictors. Figure 5.4C—The Predictive Redundancy of Highly Correlated Predictors. Figure 5.5 —Non-linear Relationship. Review HR Planning Today 5.1 —Regression in Action. Learning Activity Review the examples to show students where the numbers come from when conducting a simple regression. Review HR Planning Notebook 5.3—Diversity and Demand. Figure 5.7—Scenario Planning. See HR Planning Today 5.2—The Delphi Technique in Action. Ask Students: What do questionnaires help with? Ans. Questionnaires investigate: 1. The importance of human competencies in the future. 2. The capacity of the organization’s current human resources. 3. Ranking the nine organizational core competencies in order of priority. See Figure 5.6— Structural Equation Model. Review HR Planning Today 5.3—Assessing the Utility of the Nominal Group Technique. The nominal group technique is well suited to brainstorming activities. Competencies are more reliably generated, while maintaining the validity of the survey data. See Figure 5.5 —Non-linear Relationship. Assumption: the statistical normality and practice that is used as a comparison for data. Facts need to be assumed and derived in the normal circumstances so that the data is not biased. Ask Students: Who are the “experts” who can provide a demand forecast? Ans. • Line managers • Business consultants • Financial analysts • University researchers • Union staff members • Industry spokespersons • Federal, provincial, and local governmental staff and officials (e.g. Employment and Social Development Canada, Statistics Canada) All contribute to accurate forecasts. Table 5.1—Staffing Table and HR Budget, Ennotville Eateries. Learning Activity With a student-generated example (such as residence food), lead a class discussion to determine what would occur with each step in the nominal group technique. Ask Students: What are some the advantages of the Delphi technique, where experts do not meet face-to-face? Ans. • Avoids problems with face-to-face groups—mainly reluctance of individual experts to participate because of shyness, perceived lower status or authority communications deficiencies, individual dominance, and groupthink. • This method serves as a great equalizer. • Elicits valid feedback from all members. • It can draw information from people located in a variety of geographical areas. Review HR Planning Notebook 5.4—Differences between Qualitative and Quantitative Forecasting Data. See HR Planning Today 5.4—Simulation in the Skilled Services Industries. Some Canadian HR Trends Tie into HR Demand • Have students read the article on some of the human resources trends to watch out for in coming years at: https://canadiangovernmentexecutive.ca/ trends-in-human-resources-to-watch-in-2017/ How Labour Demand Forecasts Are Made—Terms Made Simple Have students review the Government of Canada site at https://www150.statcan.gc.ca/n1/pub/11-634-x/2016001/section2/chap5-eng.htm Instructor Manual for Strategic Human Resources Planning Monica Belcourt 9780176798086, 9780176570309
