Backing tracking: Avery Dennison bets big on new wave of RFID.

Years ago, the Radio Frequency Identification label had been relegated to the file of "high-tech promises not fulfilled" because of its slow development and implementation. But RFID labels may yet change the world of logistics.

Avery Dennison Corp., the world's largest manufacturer of pressure-sensitive label materials, is gambling on it. Late last year, the Pasadena firm introduced its Generation 2 RFID inlays, which it says are finally at a price and quality that will bring it into mainstream use.

The inlays, which consist of an antenna and a small microchip, are manufactured and sold by Avery, and other manufacturers such as 3M Company, to converters that incorporate the inlays into a label that can be stuck on a product, box or entire shipment.

Though far from a new technology, recent advancements in RFID have some in the industry excited.

Dan Akman, a spokesman for the National Association of Manufacturers, said he saw a demonstration in which two pallets of thousands of compact discs were received, checked and cross referenced against an invoice in a matter of seconds.

"The system is capable of finding that the third box from the bottom was missing a bundle of 10 CDs, all in a matter of nanoseconds, with no one having to physically handle the product," Akman said. "That' s amazing."

Avery hopes to be first in line when, and if, the technology does explode.

"RFID isn't really Avery's business," said Start Drobac, Avery's vice president of RFID, said. "But we feel our extensive manufacturing muscle and know-how can make us one of the industry leaders in getting this technology implemented. The potential in this market is huge."

Developed around World War II, RFID technology uses a radio signal to identify a certain product. It has been used by the military to track aircraft parts, by libraries to automate book checkouts, and commonly is used by employees to get into a parking structure or an office building by swiping a credit-card sized badge across a reader that beeps when scanned. But it's only recently that companies pushed RFID into automating supply chains.

Chula Vista-based RSI ID Technologies is an Avery-certified converter, meaning it converts the materials Avery makes into labels. Wolf Bielas, the founder and chief executive, said large companies including Wal-Mart Stores Inc., Best Buy Co. Inc. and Global Gillette have prodded growth by requiring RFID with their products and shipments.

"You have companies like Wal-Mart holding a gun to the heads of their suppliers telling them they have to implement this technology," Bielas said. "After a company begins using RFID in a 'stick and ship' fashion with only a few of their clients, they see the real benefit this technology offers and look at implementing it in their own company."

Although the technology still has a few bugs, Drobac said that durability and price for the new-generation RFID label, the two most crucial issues, are where they need to be or very close. Avery can sell its inlays to a label company for 7.9 cents each. The resulting label costs about 15 cents. A year ago, the same label was twice that.

Akman adds that because prices are getting lower, the RFID market is poised for growth and could change the entire manufacturing landscape and maybe even affect prices-consumers pay.

"When you have a fully-automated and transparent supply chain; it enables manufacturers to carry less inventory and to lose fewer products in the shipping process. Inventory management and supply efficiency are two of the largest costs to a company. If they can cut those, then that benefits everyone."

Though this may be an optimistic view, a study performed last month by Cleveland-based Freedonia Group Inc., shows RFID labels are expected to see a flash flood of demand over the next three years, something Avery is betting on. The study said that demand for RFID labels is predicted to surge from 35 million labels, which was the number sold in 2004, to a predicted 2 billion in 2009. However, whether such a flood ever happens is an open question.

"Just about every time a new technology is introduced, you see what we call 'irrational exuberance,'" Drobac said. "People expect the technology to do the impossible and it slows its development because it can't deliver. We're seeing the end of that phase now."

According to Daniel Ortwerth, an analyst with St. Louis-based Edward Jones, Avery is placing a heavy bet the technology is where it needs to be, about a $25 million-a-year bet, and has yet to get close to breaking even.

"When looking at the return on investment thus far, RFID is definitely still a bird in the bush, versus a bird in the hand," Ortwerth said. "But Avery is an industry leader in everything they do and they are aligning themselves to be just that in this emerging but uncertain market."

Bielas feels the time has come for RFID to move into the mainstream and has seen his RFID business expand 500 percent over the past year. The RFID market is still relatively small--only a few hundred million tags were sold last year-and it is a tiny portion of Avery's overall business.

There are still some challenges ahead. Qualified RFID technicians are few and certain glitches with the labels on some metal cans and liquid-filled items have proven troublesome. "Even cell phones still have dropped calls from time to time," Drobac said. "It's the same with RFID systems. We're betting time and American ingenuity will solve those problems."