Human resources planning uses forecasts about product and service demand and insights about internal labor fluctuations to measure the appropriate supply of labor for a firm's operations. Being able to correctly approximate labor availability and needs is crucial. Labor surplus or shortage can be realized if the workforce does not match up with present infrastructure and needs.
Most human resources departments rely on external metrics to gauge the demand for labor, since the ultimate cause of demand comes from consumer preferences. When consumers demand more of a product or service, firms have an incentive to increase their output to maximize profits. This can lead to hiring more employees and innovating to realize economies of scale.
Labor supply, on the other hand, comes from internal movements as much as external factors. Transitional matrices can be used to spot employee movements over time. Businesses need to track turnover – not just when it happens, but when it might happen.
The effective supply of labor doesn't just depend on having healthy bodies. It also requires having the requisite skills to create and deliver the business's products and services to customers. When skills are not available internally, they must be sought externally. Here, options are limited by the relative cost of acquiring new skills. When new labor is expensive and skilled workers are in high demand, companies may consider alternatives to hiring. The marginal cost of hiring and training an employee must be offset by the added marginal revenue product.
Human resources planning involves strategies to address imbalances in labor supply and demand. In the face of additional labor needs, companies can encourage overtime work, hire temporary employees, outsource, engage in new retraining programs or find other ways to improve productivity. To reduce an expected labor surplus, a company might downsize, implement a hiring freeze, reduce pay or hours, or increase output.