I've seen shipping labels with HTML encoded characters, like é and è. I'm not sure if that's better or worse:

Łódź

This is a pretty frequent thing to encounter actually. Just some years ago many websites actually preferred to use ISO/Windows codepages to save space on multibyte Unicode symbols adding HTML entities to represent everything which is not in it the basic ASCII and their primary language alphabet.

Fun fact: I was looking for an e-mail solution for a small company about a decade ago and found Zarafa. It seemed nice and I deployed it happily. Just to find out it only supports the Western European ISO codepage which was hardcoded. I hope they have switched to UTF-8 since then.

Always omit diacritics when giving your address/name to foreign parties which are going to have to ship you anything or issue any documents for you.