Labor Budgeting and Labor Forecasting

by | Jun 17, 2019

A common challenge that retailers experience is the mismatch between the number of labor hours forecasted and the actual number of labor hours they need to properly serve customers. 

In a perfect world, if you had 23 hours of customer service to perform, you would want to staff 23 hours of labor. But we all know too well that the demand curve in a retail environment is far from smooth, with seasonal, weekly, daily, and hourly fluctuations that can make labor forecasting unpredictable and inaccurate. The one constant in all this is the baseline number of employees that you need on-site to keep your store operating. This is your labor minimum. 

When you build a labor forecast, your labor minimums are something that you need to keep a close eye on. We’ve seen retailers use a variety of approaches to setting minimums, and the effect that the different methods can have on forecast accuracy is dramatic. 

Some use weekly staffing minimums (or base hours), but don’t consider the tendency to top-up based on the daily or intraday shape of trade. Others look at the weekly shape of trade and set daily minimums, while others don’t set minimums at all. But to produce an operational plan/budget that reflects the true interaction of labor standards and staffing minimums, retailers should be forecasting labor demand at the most granular level possible. This is where many workforce management solutions and Excel-based models functionally fall short, and where your finance team may tend to conceptually overlook things.  

To understand why, let’s look at three different approaches to this process, each at a different level of forecasting maturity, that yield three very different labor forecasts. 

Maturity Level 1: Not Setting Minimums 

When no minimums are required, most retailers allocate weekly labor without adjusting for any shape of trade. In this case, the budget is usually just set a certain percent higher than is needed to ensure there are always enough hours to cover customer demand. As you can imagine, this can be an extremely imprecise practice, often leading to significant staffing overages on some days and shortfalls on others. This is the least sophisticated method of looking at your staffing and should be avoided if possible. 

Maturity Level 2: Setting Minimums Based on Weekly Shape of Trade 

For a more complex scenario, let’s assume your store is open for 78 hours a week – 12 hours from Monday to Saturday and six hours on Sunday. Your business rule states that you always need a headcount minimum of two per hour. Your weekly minimum hours calculation, or the total number of hours to be filled, is then 156 (2 x 78).

Also imagine that your labor model, by coincidence, forecasted that you would need 156 labor hours this week. You’d be forgiven for thinking that your labor model has forecasted enough hours to cover your week. 

As shown in Figure 1 below, however, when your 156-hour forecast is allocated across each day based on their share of trade, some days fall below the minimum amount of labor required to cover that day. If you staffed your store solely according to your labor forecast, you would fail to satisfy your business rule of having two employees on-site from Monday to Friday. More importantly, it also means that the budget from the forecasted labor will be lower than what you need. 

Figure 1: Distribution of labor hours per week

To fix this shortfall, as seen in Figure 2, labor hours are “topped up” to ensure that total trading hours for the week are covered with at least the minimum amount of labor per hour. What results is a slightly more accurate picture of your total labor requirement, with 156 hours of forecasted labor, 17.3 hours of top-up, for a grand total of 173.3. This method allows you to meet your rule requirements without making your forecast calculations too complex by looking at it on a weekly basis.

Figure 2: Adjusted Weekly Labor Requirements, Including Top-Ups

Maturity Level 3: Setting Minimums Based on Daily Shape of Trade 

An even more sophisticated way to calculate labor minimums is by day, where labor is topped up to ensure that the trading hours required to operate the business for each day are covered. 

Let’s take Monday, for example. Recall that in Figure 1, we saw that there was a shortfall of about one labor hour on Monday. But now let’s look deeper at the hour-by-hour shape of trade. 

As you can see in Figure 3, the hourly view paints a very different picture of how much labor we need to top-up. We don’t need one hour of top-up… we need more than 10! And if you repeated this analysis again for the other six days of the week, you would identify over 50 hours of top-up that you would have missed had you only been looking at the weekly shape of trade. 

Figure 3: Adjusted Daily Labor Requirements for Monday, Including Top-Ups

 So, What Does It All Mean? 

The more granular you are in your approach to forecasting and setting minimums, the more accurate your labor requirement will become. The third model discussed above gives you that detailed approach to provide a better forecast. When you employ the right labor requirement consistently, you’ll be better able to manage operational costs by reducing the number of times you’re over or understaffed, re-engage employees who may have been impacted by incorrect staffing levels in the past, and delight your customers by providing them with the level of service they deserve and expect. 

You can see how important it is to ensure you create the correct minimum top-up allowances. This is particularly important if the hours calculated by the labor model are then exported to a scheduling application that has a minimum coverage function. 

However, the process of forecasting labor and setting staffing minimums should never be a one-size-fits-all routine. Rather it should consider each store’s history, its customer demographics, the type of store, special days/sales, etc. In other words, there may be overriding rules (like one-two-two coverage) that span your entire chain, but retailers are best served by adapting them to the specific needs of individual stores, seasonality, or special events. Doing all of this, as well as modeling the shape of trade in Excel or a home-grown solution at the hourly or even quarter-hour level is nearly impossible. This job needs to be managed in the WFM system, since it relies on the intraday shape of trade to accurately deploy labor. 

No matter which maturity level you’re at now, Axsium can help you ensure that your labor model is accounting for minimums in the best way for your business. We will analyze a broader set of stores and recommend/configure updated staffing rules in your WFM system, some of which may dynamically change with different events or seasonality. Managing at this level of store-specificity requires additional overhead, but it will help guarantee that labor is being deployed in the most optimal way throughout the day, week, and year. 

Reach out to us anytime to discuss how to optimize your unique labor model.

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