Avery Dennison Corp. is trying to capitalize on mandates from the nation’s largest retailers that their suppliers start using radio frequency identification tags this year to help track orders and inventory.

Pasadena-based Avery announced plans to invest up to $60 million in machinery and a new plant in South Carolina that will sharply step up production of the RFID materials. The company is expected to have its new high-speed RFID manufacturing processes running by the end of this month.

“It’s basically a label,” said Stan Drobac, vice president of Avery’s RFID division. “You need people who know how to take big rolls of material and do roll-to-roll manufacturing.”

The RFID label is a super-thin microchip and antennae sandwiched between layers of paper on giant rolls of adhesive material. Bar codes require machine scanning, but RFID readers automatically send out a signal and receive a response from the tags with identifying information more detailed than what bar codes provide.

One use could be in recalls for tainted drugs, since it would allow an individual bottle to be traced from the factory to the shelf almost immediately. In addition, emptying shelves presumably would be detected earlier, allowing for more expedient ordering.

A recent agreement on universal standards now allows for wide-scale RFID use. Smaller manufacturers are likely to stick to bar codes for a while because they’re cheaper.

The effort comes as Avery’s earnings and sales from its core office supplies business have flattened the result of increased competition. The company, which just named Dean Scarborough as its chief executive, succeeding Philip Neal, sees RFID materials as its most important area of growth over the coming five to 10 years.

Large retailers and the U.S. Department of Defense are requiring that palettes of goods be tagged with RFID labels by the end of the year. The use of this technology could bring significant savings by cutting time and labor, more accurately accounting for assets, and preventing theft and counterfeiting.

Among the retailers heavily involved in the tracking program are Wal-Mart Stores Inc., Albertsons Inc. and Target Corp.

“If every carton would be tagged, it would be about 6 billion tags a year, just to support the Wal-Mart program,” said Drobac. “That would exceed world capacity to make RFID tags by a factor of 10, so there’s a huge gap, a huge need.”

Payton Smith, an analyst at Input, a Reston, Va.-based public sector research firm, said the defense industry is one huge logistics operation that has particularly high needs for accountability of asset-tracking.

“When you get down to it, the federal government has the single largest expenditures in the country with the largest acquisitions process, so it has a tremendous need for applications that streamline its supply chain,” Payton said.

Expanding market

Avery is positioning itself to be a major supplier of the basic material rolls of adhesive material on which microchips are inlaid. Its market is made up of companies that manufacture electronic equipment needed to custom cut and print the devices.

“We will be selling the rolls of adhesive materials with RFID constructions embedded in it, and the companies that make ‘converters’ sell labels to companies like Gillette,” Drobac said.

Avery officially started its RFID applications division in September, but it has been investing in research and development for nearly 15 years. Much of the groundwork was laid by its production of small testing strips that allow customers to check batteries’ power level. Avery started producing the strips, essentially complex labels with chemical reaction components, for batteries made by Duracell, a unit of Gillette Co., in 1996.

One obstacle to wide-scale RFID use is that it competes with the ubiquitous and cheaper bar codes. Simon Yates, senior analyst at Forrester Research in Cambridge, Mass., said that to be cost effective on a per-product level, the RFID tags must be about 5 cents each. They currently run around 15 cents; bar codes cost a penny.

Two of the leading companies making RFID components, Alien Technology Corp. and Matrics Inc., a unit of bar-code scanner maker Symbol Technologies Inc., have gotten the cost of the chip and antennae down to about 5 cents each, and are working toward a penny.