Eastern and Southern Africa Journal of Agricultural Economics & Development Vol. 9 (2012), pp. 74-86This paper investigates the technical efficiency of smallholder dairy farmers in Tanga City using the Stochastic Production Frontier Function (SPFF) approach. The study estimates the levels of Technical Efficiency (TE) of smallholder dairy farmers. This was a cross sectional research design which used simple random sampling technique to select the subjects into the study. A total of 80 smallholder dairy farmers were interviewed using semi–structured questionnaire. Data analysis techniques included collating field data and decomposing it into descriptive statistics and estimating the stochastic production frontier model for dairy keepers in Tanga City. The overall Technical Efficiency (TE) of smallholder dairy farmers in Tanga City was 89.7%. The study found that labour, feeds, veterinary services and capital stock increase the ability of producing more milk which in turn boosts milk productivity and thereby raises milk supply. However, labour cost was found to have a negative effect on the TE while feeds veterinary services and capital stock had positive effect. Therefore, this study recommends reduction of labour costs through the use of improved simple mechanical technologies that reduce drudgery in pasture cutting and hence increase labour productivity.