How to Expertly Forecast Labor Demand to Optimize Labor Cost

Filip Dimkovski - TBR writer
By Filip Dimkovski
Nevena Radulović - Trusted Brand Reviews Editor
Edited by Nevena Radulović

Published November 23, 2022.

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Forecasting labor demand is essential for any business to efficiently manage its labor costs. Accurately predicting the amount of staff you need for a given period of time can not only help you optimize the labor costs in your organization but also allow you to manage your workforce more efficiently. A precise labor demand forecast will allow you to meet customer demands while remaining cost-effective and ensuring your company isn't overstaffed or understaffed.

This article will outline the steps you need to take to expertly forecast the labor demand for your business and optimize labor costs. It will also discuss the key considerations when making predictions and provide tips on improving accuracy. Finally, it will explain the importance of regularly monitoring labor demand and adjusting forecasts accordingly so your business is prepared for any scenario.

» Labor costs can be reduced through a global workforce. See how to effectively manage yours

What Is Labor Demand Forecasting?

In simple terms, labor demand forecasting is the process of predicting the amount of staff a business will need to meet customer demands over a given period. Organizations predict labor demand based on a variety of data sources, including past performance, customer trends, and seasonal changes. A successful labor demand forecast will provide an organization with an accurate estimate of the staff that will be needed to avoid over- or understaffing.

There are multiple reasons why forecasting labor demand is a vital process for any organization. By accurately predicting the number of employees needed to meet customer demands, organizations can minimize the labor costs they incur. In addition, forecasting helps organizations prepare for any changes in customer demand, allowing them to react quickly and staff up or down as necessary.

» Need to staff up? Expand your global workforce with the right strategy

5 Proven Labor Demand Forecasting Techniques

As a data-driven process, labor demand forecasting is best performed using a combination of techniques and a human resources information system (HRIS) to ensure accuracy. Here are five of the most effective and proven techniques for labor demand forecasting:

1. The Delphi Method

The Delphi Method is a structured process involving multiple rounds of expert-led questionnaires or surveys. It requires gathering feedback from various stakeholders—including management, supervisors, and employees—which is then used to generate a consensus forecast of the labor demand for a given timeframe.

There are multiple variants of the Delphi Method you can try using in your organization:

  • Brainstorming – involves gathering opinions from stakeholders in an open and creative environment to generate ideas.
  • Nominal group technique – focuses on gathering input from a smaller number of experts.
  • Survey research – requires gathering feedback from a larger group of stakeholders with the help of surveys.
  • Focus groups involve gathering opinions from a smaller group of stakeholders in an interactive setting.
  • Statistical modeling – uses statistical models to generate an accurate forecast of labor demand.

As you can probably guess, the Delphi Method is an effective tool for labor demand forecasting in various situations. For example, it can be used to accurately predict the amount of temporary staff needed during peak periods, such as holiday seasons or sales promotions. It can also be used to forecast the labor requirements for new business initiatives or to estimate the staffing for a new product launch.

2. Historical Analysis

Historical analysis is a simple yet effective forecasting technique that involves analyzing past performance to accurately predict future labor demand. This method considers past trends and patterns, such as customer demand, seasonal changes, and employee performance.

Depending on the use case, there are multiple different types of historical analysis you can try performing at your organization:

  • Time-series analysis uses data from past periods to generate an accurate forecast for the future.
  • Event analysis – looks at specific times when there have been significant changes in demand and uses this data to project future trends.
  • Seasonal analysis analyzes specific months or times of the year when demand is typically higher and uses this data to make projections for future labor requirements.
  • Regression analysis – examines past performance and looks for patterns that may indicate future labor demand.

As a labor demand predicting technique, historical analysis best forecasts the labor demand for a specific period. For example, businesses can use this technique to accurately estimate the number of employees needed during peak periods such as Christmas or Easter. However, you can also use historical analysis to predict the amount of staff needed for a new product launch or a business expansion.

3. AI Forecasting

AI forecasting is a technique that relies on Machine Learning (ML) and Artificial Intelligence (AI) algorithms to accurately predict future labor demand. Modern technologies have the ability to use historical data and patterns to generate forecasts with great precision with a minimum of human intervention.

Your organization can utilize AI & ML to predict labor demand in the following ways:

  • Predictive models use historical data and Machine Learning algorithms to generate accurate forecasts.
  • Natural language processing (NLP) – a technique that uses AI to analyze various sources of data and generate insights.
  • AI-powered recommendation – uses customer data to personalize recommendations for labor demand forecasting.

AI forecasting is a powerful tool for organizations looking to optimize their workforce planning in every scenario. By using predictive models and AI-powered recommendation engines, businesses can accurately predict customer demand, seasonal changes, and employee performance. It can also help predict the impact of changes in the labor force on the future demand for a specific job, optimize employee scheduling, and minimize overtime costs.

4. Quantitative Data Analysis

Quantitative data analysis is a technique used to analyze measurable data and draw meaningful insights from the results. It involves collecting data about the labor force, performing calculations, and interpreting the data to generate an accurate forecast.

There are multiple approaches you can take to perform quantitative analysis, including:

  • Statistical analysis – looks at data collected from a variety of sources to generate accurate predictions.
  • Econometric modeling – uses economic data and mathematical models to forecast labor demand.
  • Time series analysis looks at the historical data to identify trends and patterns that may be used to predict future labor demand.
  • Machine Learning algorithms – analyze large sets of data and generate accurate forecasts.
  • Monte Carlo simulations use probability distributions and random sampling techniques to generate predictions.

These advanced techniques can be used to forecast labor demand in a variety of ways, from predicting customer demand to anticipating changes in the labor force. Quantitative data analysis can also be used to optimize employee scheduling and minimize overtime costs. By combining quantitative and qualitative data analysis techniques, businesses can create accurate forecasts and make informed decisions about their workforce planning.

5. Market Research

Market research is a technique used to identify potential labor demand from the market. It involves gathering and analyzing data about customers, markets, competitors, and other factors to determine the potential demand for a particular job or skill set.

Depending on what insights you exactly need, you can try different ways of conducting market research:

  • Surveys – allow businesses to gather data about customer preferences to determine the demand for specific skillsets.
  • Focus groups – identify trends and patterns in customer behavior.
  • Interviews – gather data from experts in the industry and gain insights into potential labor demand.

Market research can be used to forecast labor demand in various ways, from identifying customer needs to tracking market trends. It's an effective tool for businesses looking to optimize their workforce planning in any scenario.

Benefits of Labor Demand Forecasting

Besides the obvious advantages of reducing labor costs and increasing productivity, accurate labor demand forecasting can provide your businesses with several other benefits:

  • It will help you avoid fraud in the personnel cycle and recognize potential emergencies in advance. By receiving precise predictions of labor demand, businesses can adjust their workforce planning accordingly and remain competitive in the market.
  • Labor demand forecasting also allows you to track workers' compensation, which is essential for ensuring compliance with the law and maintaining an ethical workplace.
  • By predicting labor demand accurately, businesses can identify potential growth opportunities, attract and retain top talent more easily, and make informed decisions about the workforce.

Overall, having precise labor predictions is critical for your business, as it helps you plan your workforce in the most cost-effective and efficient way possible. Without it, your business risks running into labor shortages and high turnover rates, which can seriously impact the bottom line.

» Avoid other business risks: make sure you're payroll compliant to avoid penalties

Common Challenges Associated With Labor Demand Forecasting

If your organization is new to labor demand forecasting, you may find it tricky to implement in your business. Some common challenges associated with this process include:

  • Data accuracy and availability – without accurate data, businesses can’t make reliable forecasts. To ensure accuracy, you need access to quality historical data and up-to-date information about the current market.
  • Difficulty interpreting data – just having access to data isn't enough—businesses need to be able to interpret it correctly. This requires a deep understanding of data analysis techniques and the labor market.
  • Difficulty forecasting future trends – since it’s subject to constant change, labor demand can be difficult to predict. Businesses need to stay ahead of the curve by keeping an eye on the market and staying up to date with current trends.

These challenges can be addressed by using advanced forecasting tools, conducting regular market research, and staying informed about the labor market.

Accurately Forecast Labor Demand to Minimize Labor Costs

In conclusion, labor demand forecasting is an important tool for businesses to maximize their workforce productivity and minimize costs. To ensure its success, it's important to have access to accurate data, employ advanced forecasting tools, and stay up to date with labor market trends. When done right, labor demand forecasting can provide businesses with invaluable insights that can help them stay competitive in the market.

» Staying competitive in the market is easier without worrying about payroll. Read TBR's payroll software reviews and choose one that will help your company thrive.

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