Forecasting labor demand is essential for businesses of all sizes. When done correctly, it can help you avoid overstaffing and understaffing, and ensure that your employees are scheduled in a way that meets customer demands. In this blog post, we will discuss how to forecast labor demand and give you tips on how to do it correctly for your business.
Why It Matters
Forecasting labor demand is important because it directly impacts your company’s bottom line. If you overstaff, you will incur unnecessary costs, and if you understaff, you will miss out on potential revenue. In either case, poor labor forecasting can lead to lost profits and dissatisfied customers.
Breaking It Down
When you work on any forecast, you need to step back and break the forecast down into pieces. What are the drivers behind the forecast?
For labor forecasting, these drivers will be things like :
- customer/production demand
- operating hours
- hours per activity cycle
Once you have identified the drivers, you can begin to build your forecast. Forecasting labor demand is not an exact science, but there are methods and tools that can help you make an accurate prediction.
The most common forecasting methods for labor demand are:
- Time Series Analysis – Use historical activity, including seasonality, to predict future results
- Activity-Based – Use the time to complete an activity (rate) against the number of times an activity needs to be completed (volume). If you complete this
We will use an activity-based forecast since it is the more detailed, bottoms-up, way to build the forecast.
The Forecasting Process
Step 1: Determine What You Need to Forecast
We’ll need to predict the following components in order to produce a reliable labor forecast:
- Activities to be completed
- Time per activity
- Cycles of each activity
- Operating hours
Step 2: Collect Inputs and Assumptions
For each of the components from step 1, you will need to collect the inputs and assumptions behind them. For example, operating hours may be fixed or may be variable, but your management team controls this input.
Whether you are a new business or an established business, this bottoms-up approach will help you forecast demand.
Step 3: Layout the Forecast Model
Once you have determined what to forecast and collected the inputs, it is time to start building a model. Forecasting models can be as simple or as complex as you want them to be. For example, if we’re forecasting labor demand for one store with just a few activities, the model will be simple.
On the other hand, if you are forecasting labor for 1,000 stores across a country, you will need a complex model with many more details.
Step 4: Run and Adjust the Forecast
Once your model is set up, you simply need to run it and adjust the inputs as needed. You will want to do this on a regular basis, especially if your business is growing or changing. Forecasting is not a one-time event; it should be done regularly to ensure that your numbers are accurate.
Step 5: Review and Summarize
You should look at your forecast results to ensure they make sense and summarize them in a way that works for your business. For example, if you are forecasting labor demand on a daily basis, you may want to do weekly and monthly views. If you are forecasting by store, you may want to view by region. You may even want to look at trend views to ensure there aren’t any outliers.
Let’s Walk Through An Example
Forecast Labor Demand For A Restaurant
Let’s walk through a basic labor forecast for a restaurant. We are going to use activity-based planning.
First, let’s lay out our forecast model. As mentioned above, we want to use the following items to forecast:
-Activities To Be Completed: A restaurant needs seaters to bring customers to a table, servers to take orders and bring food, and cooks to make the food.
-Time Per Activity: How long it takes seaters to seat, servers to serve, and cooks to make a meal.
-Cycles Of Each Activity: How many times each of the activities will be repeated. A guest needs to be seated and served once, but they may order multiple courses.
-Operating Hours: This is a “floor” or minimum number of hours each position needs to be staffed. Even if the activities aren’t taking place, if you are open you need staff.
Here is what the forecast model looks like:
Now, we need to work with the model to calculate labor demand. The minimum labor demand will be one position for each activity type. We will take the guest counts (calculated by forecasting customer demand) against the cycle time for each activity to finish the forecast.
Here is the final forecast:
Tips and Tricks
Finding Data And Assumptions
Forecasts are only as good as the data and assumptions you put into them. So where can you find solid data? If you have an existing business, the first place to look is your financial system. Historical data is one of the best inputs to a forecast. You can also work with your operations teams to understand what it will take to deliver a certain level of performance.
For a new business without historical info, you will have to dig a bit deeper. Economic data and market research are your best bets. This can include digging into resources like the Consumer Product Index (CPI) for inflation or studying your competitors.
Step Back And Do A Gut Check
As you get into the weeds of your forecast, it is important to step back and ask yourself, “Does this make sense?” Think about how the forecast looks year-over-year and sequentially. Do you have the capacity and workforce to even deliver the forecast? Do the trends seem reasonable or are there unusual outliers in the forecast?
It is critical to sanity-check your work and ensures you put out a great product
Build For the Future
When working on a forecast, do yourself a huge favor and build it for the future. Well, obviously a forecast is for the future, but I mean the model itself. If you are running a forecast today, you are likely to run the forecast again. Make sure the model is dynamic enough to pull in new actuals and roll forward for future time periods. Avoid hardcoding, and try to link everything up to data tables. Make it clear which periods and cells are actuals and which are forecast.
This may take some extra time to set up, but it will really pay off down the road.
When it comes to forecasting labor demand, there are a few key things to keep in mind. First, you need to determine what to forecast and collect the necessary data. Once you have that information, you can start building a model that will accurately predict future labor needs. It’s important to regularly run and adjust your forecast and to review and summarize the results in a way that makes sense for your business. With a little bit of effort, you can develop a forecasting system that will help your business run smoothly and avoid overstaffing or understaffing issues.
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