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Monday, October 19, 2009

Human Resource Forecasting

Demand forecasting is the process of estimating the future quantity and quality of people required. The basis of the forecast must be the annual budget and long-term corporate plan, translated into activity levels for each function and department. In a manufacturing company, the sales budget would be translated into a production plan giving the number and type of products to be produced in each period.

Forecasting Techniques
Forecasting techniques vary from simple to sophisticated ones. Some techniques are:
1. Managerial judgement
2. Ratio-trend analysis
3. Work-study techniques
4. Flow models

Managerial Judgement: This technique is very simple. In this, managers sit together, discuss and arrive at a figure, which would be the future demand for labour. The technique may involve a ‘bottom-up’ or a ‘top-down’ approach.

Ratio-trend Analysis: This is the quickest forecasting technique. The technique involves studying past ratios say, between the number of workers and sales in an organization and forecasting future ratios, making some allowance for changes in the organization or its methods. The following table shows how an analysis of actual and forecast ratios, between the number of routine proposals to be processed by an insurance company’s underwriting department and the number of underwriters employed could be used to forecast future requirement.

Word-study techniques: Word-study techniques can be used when it is possible to supply work measurement to calculate the length of operations and the amount of labour required. The starting point in a manufacturing company is the production budget, prepared in terms of volumes of sellable products for the company as a using standard hours for direct labour. The standard hours per unit of output are then multiplied by the planned volume of units to be produced to give the total number of planned hours for the period. This is then divided by the number of actual working hours for an individual operator to show the number of operators required. Allowance will have to be made for absenteeism and idle time. Following is a highly simplified example of this procedure.

1. Planned output for next year 20,000 units
2. Standard hours per unit 5
3. Planned hours for the year 1,00,000
4. Productive hours per man/year
(allowing normal overtime, absenteeism and idle time) 2,000
5. Number of direct workers required (4/5) 50

Flow models: Flow models are very frequently associated with forecasting personnel needs. The simplest one is called the Markov model. In this technique, the forecasters will:
1. Determine the time that should be covered. Shorter lengths of time are generally more accurate than longer ones. However, the time horizon depends on the length of the HR plan which, in turn, is determined by the strategic plan of the organization.
2. Establish categories, also called states, to which employees can be assigned. These categories must not overlap and must take into account every possible category to which an individual can be assigned. The number of states can neither be too large nor too small.
3. Count annual movements (also called ‘flows’) among states for several time periods. These states are defined as absorbing (gains or losses to the company) or non-absorbing (change in position levels or employment status). Losses include death or disability, absences, resignations and retirements. Gains include hiring, rehiring, transfer and movement by position level.
4. Estimate the probability of transitions from one state to another based on past trends. Demand is a function of replacing those who make a transition.

Once the HR department projects future demand for human resources, its next major concern is filling projected openings. There are two sources of supply: internal and external. The internal supply consists of present of present employees who can be promoted or transferred, to fill expected openings. The external supply consists of people such as employees of other organizations and the unemployed.

Estimates of Internal Supply
Estimates of the internal supply involve more than merely counting the number of employees. Planners audit the present work force to learn about the capabilities of workers. Considering present employees for future job openings is important if workers are to have lifelong careers with their employer rather than deadend jobs.

Audit and replacement charts are also important additions to the HR department’s information base. With greater knowledge of employees, the department can play recruiting, training and career planning activities more effectively.

1. Human Resource audits: Human resources audits summarize each employee’s skills and abilities. The audits of nonmanagers are called skill inventories; the audits of managers are called management inventories. Inventories of human resources are often computerized to match talent with openings and are updated periodically. Computerized records also facilitate updating, which should be done at least every two years if employees are encouraged to report major changes to the HR department when they occur. Failure to update skills inventories can lead to present employees being overlooked for job openings within the organization. Management inventories should be updated periodically since they are also used for key HR decisions.

2. Replacement charts: Replacement charts are a visual representation of who will replace whom in the event of a job opening. The chart, much like an organization chart, depicts the various jobs in the organization and shows the status of likely candidates. This is called Succession planning.

Estimates of External Supply
When there are no replacements or when the opening is at the entrylevel, they is a need for external supply of human resources.
1. External needs: Growth is primarily responsible for the number of entrylevel job openings, especially is the company promotes from within to fill job vacancies. The lack of promotable replacements creates job openings that need to be filled externally.
2. Labour market analysis: Success in finding new employees depends on labour market and on the skills of the employment specialists in the human resources department. For highly skilled jobs, the relevant market may be in the entire country. Whether employment rates are high or low, many needed skills are difficult to find.
3. Community attitudes: They affect the nature of the nature of the labour market. Antibusiness or nongrowth attitudes may cause employers to locate else where.
4. Demographics: Demographic trends are another longterm development that affect the availability of external supply. Fortunately for planners, these trends are known years in advance of their impact.

I am familiar with Larsen & Toubro Limited. It is India's largest engineering and construction conglomerate with additional interests in IT and electrical business. A strong, customer-focussed approach and the constant quest for top-class quality have enabled the Company to attain and sustain leadership position for over six decades.

L&T follows ‘bottom up’ of management judgement and work study techniques for demand forecasting. Forecasting process in L&T begins during November of every year. The department heads prepare their personnel estimates (based on details of production budget supplied to them) and submit the estimates to the respective personnel mangers (L&T has 11 plants in our country). The personnel heads will review the estimates with the departmental heads and will send final reports to the Mumbai office where a centralized HR department is located. Estimates are reviewed by the HR department and final figures are made known to those personnel managers who initiate steps to hire the required number of people in the following year. The forecast is made for a quinquennium, but is broken down to yearly requirements.


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