Human Resources Planning and Development Analyzing and Forecasting Demand

Analyzing and Forecasting Demand

Introduction
In our last module, we discussed the significance of the supply analysis and how it can be used
to forecast future supply. We discussed several methods and the appropriate applications for
each of those methods.

Supply by itself is only part of the equation; we now will turn our attention to demand analysis
and forecasting.

It is the analysis of demand that allows us to closely integrate the function of HR planning with
the business plans of the organization for which we are developing the plan.

HR demand is defined as the knowledge, skills, abilities, attributes, or competencies necessary

to complete the work of the organization.
At its most fundamental level, HR demand is derived directly from the jobs that are done to
complete the work of the organization.

Demand analysis begins with job analysis and proceeds in ever-increasing scope to the
organizational analysis. It can focus on system analysis so that HR Planners can influence how
work is allocated throughout the organization.

Like supply analysis, demand analysis can be approached from the qualitative or quantitative
aspects.

Also like supply analysis, demand analysis has four dimensions:

• Current internal - projected internal, or forecasts
• Current external - projected external, or forecasts

Remember the pincushion?

Human Resources Planning and Development Analyzing and Forecasting Demand

Learning Outcomes
After completing the assigned readings, the online content and related activities, you will be able
to define and apply a variety of factors to a number of "real" situations that are facing
businesses, government and not-for-profit agencies today.

These factors will include:

• Define and describe a number of methods of demand analysis
• Discuss the dimensions of demand analysis
• Apply methods of demand analysis that are appropriate to specific situations
• Discuss the impact of demand analysis on business strategy and, ultimately, productivity
• Begin to use demand analysis as a forecasting tool

Internal Demand Analysis

Demand analysis deals with current demand and begins with analysis of business requirements
on three levels:

The Job Level: Job Analysis

Remember, analysis simply means looking at an entity and breaking it down into its constituent
parts, so we can understand the relationship of each part to the whole and re-constitute in a
different manner if necessary and appropriate.

Job analysis can be completed using any one of the following common techniques:
• Critical incident technique
• Behaviorally-anchored rating scales
• Position analysis questionnaire
• Functional job analysis
• Hay system

Each of these techniques requires careful observation, documentation, and validation.

** For details about each technique of job analysis, take a look at any good textbook on HR
Planning, Human Resource Management, Recruitment, or Compensation.

The value of job analysis is that it provides an excellent snapshot of "what is", not unlike the HR
Inventory on the supply side.

The System Level: System Analysis

System analysis, in the context of demand analysis, shows us the interrelationship of individual
jobs - with the focus on how they contribute to the whole - in terms of getting things done.

For example, let us think about an accounts payable function in any organization.

Before any invoices are paid, someone has to:

• ensure the goods are received
• check the invoice against the packing slip
• check out the timeliness of payment
• make sure there is money in the bank
• cut the cheque
Human Resources Planning and Development Analyzing and Forecasting Demand

• sign it

To ensure proper controls, there will be several different people involved in this process or
system, and they all must work together to get the goods paid for.

A system analysis would look at each aspect of this process and make recommendations for
improvement while still respecting the rules associated with financial control.

A systems approach to analysis can help the HR Planner see if all the skill sets necessary are
available, or if there are gaps.

The Organization Level: Organizational Analysis

Organizational analysis will help the HR Planner understand what those strategic and tactical
goals are and will surface the 'demand analysis' at the organizational level.

Within the organization, there are several systems that must collectively ensure that the
strategic and tactical goals of the organization are met.

External Demand Analysis

External Demand Analysis focuses on the external pressures in the organization.

Economic Pressures
For example:
The current position in the business cycle or the impact of economic policy such as interest
rates or political issues (wars or other forms of political unrest, etc).

Social or Demographic Pressures

More specifically, the changes in the make-up of the labour market or changes in public policy.
For example:
The increased parental leave or newly sanctioned leave to care for aging or dying family
members.

Production Technology Pressures

More specifically, the changes in production technology. This will require new skill sets in the
organization.

These pressures may have an impact on the need for the product that the company is
producing, therefore forcing a change in the "derived demand" for labour in the organization.

Demand Forecasting
Demand forecasting deals with the projections of future demand, based on business
requirements.

Demand forecasting is impacted by:

• External issues
• Organizational shifts
o such as increasing or decreasing budgets, shifts in production, or new ventures
• Supply pressures including:
Human Resources Planning and Development Analyzing and Forecasting Demand

o retirements
o resignations
o terminations
o deaths
o leaves of absence, etc.

Forecasts are commonly drawn from what we know is currently happening, or what has
happened historically.

For example:
If you know that 20 employees can produce 10,000 widgets per year today, and you want to
produce 20,000 widgets next year, you might forecast that double the production requires
double the human resources.
How many staff will be required with your prediction? (Answer: 40 staff)

Analysis begins with analyzing current needs, and the structure and jobs you have now to meet
these needs.

Managers then compare what they have learned about the organization now with short/medium
range goals to determine the future need for staff, or to determine if changes are required in
work activities.

Forecasting can range from informal to very formal, and the method chosen will depend on
organizational culture, expertise and needs.

Qualitative and Quantitative Forecasting

There are two categories of forecasting:

1. Qualitative
• sometimes called judgmental

2. Quantitative
• based on the use of numeric measurement

Both methods use predictor/independent variables.

Qualitative and Quantitative Forecasting Methods

Predictor Variables VS Dependent Variables

Predictor Variables
They are what you base your decisions one. These are the facts that form the basis of your
predictions –those facts that explain why you went in that direction.

Generally, predictor variables are elements such as:

• historical data
• information or experience related to the output of goods
Human Resources Planning and Development Analyzing and Forecasting Demand

• information related to employee productivity

Dependent Variables
The variable which is being predicted.

When you talk about how close the relationship is, you are dealing with how likely it is that your
outcome will be as you predicted.

Therefore, you have to make sure that the predictor variable is a logical partner and that the
relationship between the predictor and the outcome is significant.

For example, training received and productivity are logical partners and may have a significant
relationship

When would you use Quantitative versus Qualitative?

Quantitative:
• Past trends or patterns are assumed to continue into the future –the organization is
stable.
• Information about the past is available.
• Information can be quantified.

Qualitative:
• When the forecast is about events that have never occurred before.
• What you have seen in the past cannot be assumed to continue into the future.
• Information about the past cannot be obtained.

Quantitative Methods

Types of Quantitative Methods

You will rely heavily on quantitative forecasting if there are no major changes in your
environment. The greater the number of changes, the more weight you will place on judgment.

Trend or Index Analysis

Begin by choosing an index that is constant over time.

For now, consider how many employees it takes to produce a certain dollar value of sales.
Index analysis suggests that you can predict the number of employees you will need to
increase/decrease sales volume, all other things being equal.

It is useful when looking at recurring conditions; for example, the Christmas rush in a retail
environment.

How many sales clerks does it take to produce each dollar of sales?
Human Resources Planning and Development Analyzing and Forecasting Demand

Using indexation can help employers figure out how many staff to take on if they anticipate
specific conditions.

To be effective, data needs to be available for review for a lengthy period of time, e.g., for the
past 5 - 10 Christmas seasons.

Results of an index or trend analysis are often expressed as a ratio.

For example, if each salesperson makes $500 of sales per four-hour shift during the busy
Christmas season, we might express this as a 1:500 ratio.
Therefore, if we want to sell $1,000 worth of goods during that same four-hour shift, we need
to double our sales staff.

While this is useful in organizations with stable conditions, it does not allow for the impact of
other variables, such as the weather.

For example, in planning for the Christmas season, we might consider mapping sales to
weather conditions, to see if we can predict how many staff are truly needed to serve the
customers without any staff standing idle.

While trend/index analysis is useful in some circumstances, we can see that including a second
variable leads us to the "art" as well as the "science" of HR Planning.

Staffing/Manning Tables
Staffing /manning tables are based on human resource budgets.

This method uses information from line managers, as well as information on:
• staffing trends
• competitors' staffing practices
• industry information, and
• Stats Canada reports

Basically, the technique is to first list all of the jobs in the organization, by area.

Then, a number of levels of activity are forecast

e.g. the amount of sales expected might be up to $10 million, or up to $25 million, or up to
$50 million.

Depending on the level of sales expected above, the number required in each job will change.

The staffing/manning table is essentially a product of indexing/extrapolation, based on a

"requirements" analysis provided by senior management.

This method is useful to assist managers in figuring how far their compensation dollar will go
under specific circumstances, and the cost of increasing/decreasing business.

Regression Analysis
This technique predicts information from data that is already available using a mathematical
formula.

We are looking at variables that have a relationship to each other.

Human Resources Planning and Development Analyzing and Forecasting Demand

The closer the relationship between the variables, generally the more accurate the forecast.
For example, it would make sense to try to predict the number of sales from the number of
salespersons on staff, but not to try to predict this from the education of those salespeople.

In regression analysis, think of your variables as being "x" and "y".

If you were to plot the values of "x" and "y", you would end up with a scatter diagram,
essentially, dots scattered over the graph.

The dots are interesting, but what you are really looking to do is to find the line which best fits
the scatter diagram - the line that most points will fall around.

The equation of that line is y=a+bx - the formula for a straight line.

Here is a scatter diagram with a "best fit" line:

The problem here is that an assumption has been made that the past growth pattern will
continue, and that the environment affecting growth will be the same.

So again, you often need to add other information to make the forecast more accurate.

Sometimes you will find that there might be a link that is not as direct as sales volume and the
number of salespersons.

Qualitative Methods

Types of Methods
Qualitative methods are used when information is uncertain, or there is an expectation of
change in demand. They reflect the dynamic nature of HR Planning.

Qualitative methods are often used in addition to quantitative methods of demand forecasting.
They represent the "art" side of the Art and Science of HR Planning.

Managerial Estimates or “Bottom Up” Approach

This can be a simple or more sophisticated method.

The simplest is the "instant" forecast. For example:

• why have the bills not gone out?
Human Resources Planning and Development Analyzing and Forecasting Demand

• There is too much work here!

• We are already working 20 hours of overtime each week
• Well we had better hire more people!

BUT...
It is a better method if it utilizes the individual opinions of managers.
• Managers are considered to be informed: they are familiar with their units, the people, the
work; they have the experience and intuition to make judgments.

The manager understands the operational needs, productivity requirements and what it takes to
get the job done.

Problems?

The manager may:

• simply not know enough about the job and what it will require in the future
• be new and may not yet have a good grasp of the things that affect staffing
• not want to take the time
• overstate requirements to allow for flexibility.

They may be influenced by their most recent experience related to the business
e.g. slow business = less staff;
booming business = more staff.

The problem is that the future is the issue.

Planners help the process by providing structure to managers. They:

• Provide managers with enough information to help make decisions - to help them apply
their judgment, e.g., historical data, statistical analysis such as staffing, productivity, etc.
• Ask the kinds of questions that can be answered a bit more specifically, e.g., rather than
asking for total staffing requirements, ask for % increases or ask about particular key
groups of staff.
• Do not look for precision. Numbers can be rounded off or managers should have the
opportunity to indicate how sure they are of their forecasts.
• Keep it simple by minimizing paperwork and keeping questions pertinent.
• Make sure everyone knows the definitions you are using so you can compare more
easily.
• You can speak to managers individually or in a group. If you use a group, it requires a
facilitator to engineer an agreement.

Note:
While the Bottom Up Approach is best, the Top Down Approach is generally used when senior
management decide that productivity must increase, or perhaps when a goal is imposed or an
organization is downsizing or merging.

Delphi Method
This is a method suited to long-range planning, especially in complex situations.

• Usually, there are external influences and more than one person's knowledge is required
Human Resources Planning and Development Analyzing and Forecasting Demand

• In this approach, several people with expert knowledge of the problem are invited from
both inside and outside the organization to form a panel of decision-makers
• Through an intermediary, who often starts with a questionnaire, each member is asked
to forecast and give solutions - anonymously, never face to face
• The ideas are then circulated to each member so that they can see the complete
forecasts and approaches of the other members
• Based on what they see, they are asked to refine or change or improve their forecasts

These "rounds" of feedback/consideration continue until there is consensus.

Disadvantages

• Time consuming, therefore suited to longer-range planning.

If participants are involved in the problem outside the panel, usefulness is diminished.

Advantages

• Uninhibited responses are the norm because no one is "tested" by the group - there are
no power trips or dominators
• Generates more alternatives because members are encouraged to be open-minded and
willing to alter their positions by exploring areas such as assumptions
• Arrives at decisions that are acceptable to a greater number of people

Nominal Group Technique

The Nominal Group Technique is similar to the Delphi technique:

• It uses an intermediary and questionnaires.

• The intermediary selects the experts and ensures that they understand the time horizon
that they are forecasting within.
• Questions are posed and experts prepare responses.

Unlike Delphi, there are no rounds. After preparing their responses, the experts meet face to
face.

During these meetings, each expert presents their answers and opinions to the group.

• This is done without interruption, which needs to be controlled by the facilitator.

• After all of the presentations, the experts discuss what they have heard.
• No attacks are permitted, which again needs to be controlled by the facilitator.
• Once all discussions are completed, a secret vote is taken to select the best forecast.

The problem is that unlike Delphi, there is not always consensus. There can be very different
ideas still in place after the vote.

The difficulties which arise because of the lack of anonymity are often difficult to control.

The problem here is that an assumption has been made that the past growth pattern will
continue, and that the environment affecting growth will be the same.
Human Resources Planning and Development Analyzing and Forecasting Demand

So again, you often need to add other information to make the forecast more accurate.

Sometimes you will find that there might be a link that is not as direct as sales volume and the
number of salespersons.

Scenario Development or Envelope Forecasting

In this approach, you explore possible futures for your organization by developing scenarios - a
picture/forecast of what will happen if that particular future takes place.

These scenarios can be as simple or as complex as the organization feels is necessary to

predict demand.

Qualitative and Quantitative Forecasting Methods

Strengths and Weaknesses
• Qualitative forecasting requires significant managerial time to be well thought out.
• Accuracy is highly dependent on managerial skill and experience.
• A real disadvantage of qualitative techniques is that the results cannot be validated
statistically and people tend to want to see numbers to be convinced.

BUT, given that you use this method when factors cannot be quantified, or there is insufficient
data, it is a very valuable method.

Remember that statistics depend on the past, and we are looking into the future.

When your environment is very complex or uncertain, this is often your only choice.
BUT, you need to figure out whose judgment you trust and build a network of managers that you
trust to provide you with thoughtful intelligence.

Summary
HR demand analysis involves understanding the knowledge, skills, abilities, and attributes
(competencies) necessary to complete the work of the organization.

Qualitative and quantitative methods of forecasting demand include:

• Trend/Index Analysis
• Regression Analysis
• the Delphi Technique
• the Nominal Group Technique, and
• Scenario/Envelope Forecasting.

As demand forecasting tools, such methods have a demonstrated impact on business strategy.

You have now completed this module. You can continue to the next module.