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Will Users Be Stuck for RFID Labels?

With RFID mandates looming, companies will soon be placing large orders for smart labels. The big question is whether label and RFID inlay makers will be able to deliver the goods.
By Jonathan Collins
Jun 28, 2004—Ever since the U.S. Department of Defense, Wal-Mart and a host of other major retailers, including Target and Albertsons, spelled out their requirements for RFID tagging on pallets and cases, suppliers have been scrambling to meet the mandates. But suppliers aren't the only companies that have to rise to the challenge. Label makers have to prepare meet the huge spike in demand for smart labels the mandates are expected to create, while they face doubts about just how much demand there will actually be and when it will come.

In addition, the combination of a new technology and a tight deadline for its deployment has created a great deal of uncertainty. “This is a brand-new technology, merging electronics and label converting. The compressed timeline is pushing all smart-label converters and inlay providers to develop their products quickly, and the stress is great,” says Karl Hoffman, CEO and president of Plitek, a small smart-label producer based in Des Plaines, Ill. “It is going to be interesting to see how it all turns out."

An RFID label, or "smart" label, is made up of an inlay (the chip and antenna joined together on a substrate), which is sandwiched between a paper label and an adhesive layer. So far, label makers (also known as label converters) and manufacturers of RFID inlays have produced only a relatively small number of smart labels for pilot implementations. (Smart labels can used microchips that communicate with readers using EPC, ISO or proprietary protocols.)

Label makers have to predict the quantity of smart labels that suppliers to the DOD, Wal-Mart and other retailers will need and then determine the manufacturing capacity that will be required to meet that need. The rate at which Wal-Mart and other retailers expand their RFID requirements next year will have enormous implications on the demand for smart labels. Wal-Mart estimates that it receives about 1 billion pallets and cases annually from its top 100 suppliers.

Initially, the January 2005 mandate will cover only three of Wal-Mart’s 108 U.S. distribution centers and 3,000 stores, so the number of smart labels required for January will number around 900,000 labels. But by the end of 2005, Wal-Mart expects to be using EPC technology in up to 13 distribution centers and 600 Wal-Mart and Sam's Club stores, and by January 2006, Wal-Mart will require its next 200 top suppliers to begin tagging cases and pallets.

But smart-label manufacturers say that estimates of smart-label use by their Wal-Mart-supplier customers vary broadly. "We have customers that are forecasting smart-label demand next year that can range between 1.5 million to 20 million," says Mike Sanzone, RFID manufacturing manager at MPI Label Systems, a Sebring, Ohio, midsize privately held maker of smart labels and label applicators. The reason for such a wide difference, he believes, is that Wal-Mart suppliers have little insight into how quickly Wal-Mart might expand its tagging requirements to additional products and distribution centers.

For the largest smart-label manufacturers, such as Avery Dennison and Rafsec, the size of the demand for smart labels is not a concern. They know its large and they are going to crank up capacity to try to meet it. "We don't know how big the market is, and we don't care—except from a curiosity standpoint,” says Stan Drobac, vice president of RFID applications at Avery Dennison, based in Pasadena, Calif. “We know it’s really big."
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