Labor forecasting: Definition, labor forecasting equation, and more

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Businesses should always strive to have enough employees on hand to get work done well — and on time. Understaffing scenarios can lead to overworked team members, missed deadlines, and frustrated clients.

But too many employees cause issues, too. If team members are standing around with nothing to do, labor costs will be higher than they should be. Not only that, but when team members don't feel useful, it can be demoralizing and may cause them to seek more engaging work elsewhere.

But what's the perfect balance? How can you know exactly what your organization's labor needs will be?

With labor forecasting. Labor forecasting addresses labor needs and minimizes both understaffing and overstaffing issues. Below, we'll dive into what labor forecasting means, the different approaches to it, and how to lay out a step-by-step forecasting strategy for your business.

What is labor forecasting?

The best way to define labor forecasting is as a workforce management process that helps companies determine their labor requirements. Using data-driven insights like historical data and information from project resource management, decision-makers can formulate accurate forecasts of their staffing needs.

It’s imperative that organizations correctly forecast their labor requirements. Many companies use labor forecasting software to aid them in their decision-making process. By effectively pinpointing the number of employees needed, organizations can ensure they serve their clients well, avoid employee burnout, and protect their bottom line.

Labor forecasting equation

We can break down labor forecasting into a simple equation:

Labor forecasting = Demand forecasting + Labor modeling

Before you can really understand what this equation shows you, you need to understand what each component means:

Demand forecasting: This metric represents your expected customer demand.

Labor modeling: This metric identifies the current labor supply and the labor your company needs to secure within a given period.

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The 5 labor forecasting methods

Businesses can use tools and methods to help them accurately forecast their labor needs. There's no single standard technique that every company uses to decide on the right number of employees during a specific period. In fact, there are five forecasting methods to choose from, and each one offers a certain functionality a company needs to achieve accurate workforce forecasting. Below, we'll explore each method in greater detail.

1) Historical analysis approach

Analyzing previous workforce data to reach future labor needs is the basis for this forecasting technique. For this method to be effective, the company must have access to previous performance data like foot traffic, customer behavior, and, in some cases, seasonal trends.

Identifying previous fluctuations in busy and slow periods is essential for this approach to determine labor needs accurately.

2) Research approach

Market research is at the heart of this labor forecasting method. Reviewing real-time workforce trends in your industry helps you identify patterns that prompt good staffing decisions. An example is looking at your main competitors’ hiring strategies during your forecasting period.

Ask these questions during your marketing research:

  • Are there any external factors impacting your company during the time you’re forecasting for?

  • How are your main competitors managing their staffing levels?

  • Do different locations experience different demands?

3) Delphi approach

The Delphi method employs an internal strategy for forecasting future labor needs. The company sends anonymous surveys to the decision makers asking for input on the current workforce and their opinions on future needs and demands. The survey administrator compiles the answers into one report. Decision makers use the responses to forecast future labor needs.

4) Advanced quantitative approach

Quantitative methods of labor forecasting use past data to predict future workforce trends. On the surface, it sounds similar to the historical analysis method. However, the way the data is used is different.

Three quantitative methods are:

  • Regression analysis: This method looks at different variables and measures their effect on the workforce.

  • Linear programming: This approach identifies holes in the current processes and lays out how to best use existing labor resources.

  • Data mining: Large amounts of historical data are wrangled into a manageable, reviewable report.

5) Managerial assessments method

Businesses use managerial leadership’s opinions for forecasting labor demand. Company leaders share their insights and beliefs about where they think the current process has gaps and what they think the company will need in the future. These assessments drive labor resource decision-making.

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Step-by-step guide for creating a labor forecasting strategy

There are many benefits labor forecasting offers to businesses of all sizes across all industries. It can mitigate high labor costs due to overstaffing, increase employee retention, improve the customer experience, and avoid lost sales that can damage your bottom line.

If you’ve decided to make labor forecasting a company priority, here’s an actionable plan for creating and executing your strategy effectively.

1) Identify your organization's key performance indicators (KPIs)

Establishing your company’s KPIs guides your company’s labor forecasting. Lay those out before you begin your forecasting, and keep them at the forefront throughout the process.

2) Analyze your company's current labor processes

Answer the question, “what are you doing now?” Look at your current employee data to get a picture of your company’s present situation. How many full- and part-time employees do you have on staff? How are they performing? Knowing where you stand on labor resources can guide you through your workforce planning optimization efforts.

Looking for a better way to manage team member workload? See how's resource management software can help you allocate work more efficiently.

3) Select your labor forecasting approach

The most efficient, predictive method for forecasting for one company may not be the best one for another. Educate yourself on the five approaches and choose the one that makes the most sense for your business and industry.

4) Analyze the labor forecasting data and identify gaps

Closely review the data and compare it with your current labor processes. Where are the gaps and weak points in your current picture? Seeing where and what the gaps are is pivotal in knowing where to focus your energy during the next step.

5) Decide what your company needs for future projects

This step is the stage where your plan starts taking shape. Do you need to hire more people? Do they need to be permanent or temporary? Part-time or full-time? Will investing in time tracking or employee scheduling software improve your workforce management efforts? Lean heavily on the previously gathered data to help with these decisions.

6) Create a strategy to fill the gaps

Fine-tune your ideas and plans into a workable, realistic strategy. Does your company need to lay people off or terminate low performers? Or does the human resources department need to create new job postings and rev up their recruiting efforts to beef up your workforce? Assign tasks to the accountable team members and set timelines during this step.

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Labor forecasting simplified with

Labor forecasting is a productive way for your company to measure your current workforce and determine where there are surpluses and gaps. As a result, it can help companies scale and become more profitable.

By understanding the forecasting equation and choosing the methodology that best fits your business, you can avoid wasting money on too many employees and mitigate customer frustration (and loss of sales) from understaffing. 

If your company needs a project management tool to help scale your business and increase efficiency within your workforce, look no further than Our user-friendly platform is packed with functionality and returns rich data-driven insights that can help you manage your labor forecasting efforts. Sign up today to get started for free!

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