At present, Indonesia is still lack of freshmilk supply, domestic freshmilk production is covered only 30% national freshmilk processing industry needed and is about 70% milk industry material should be imported, mainly from New Zealand, Australia, EU and USA. The following actors are active in the formal dairy supply chain in Indonesia: (1) Milk producers, (2) The primary dairy/ village cooperatives (KUD), (3) The overall dairy cooperative (GKSI), (4) The milk processors/ dairy industry, (5) Based on that situation, and to improve the development of smallscale dairy farming activities in East Java, this paper have an objective to examine the relevance of a rules-based freshmilk price structure policy in East Java. East Java dairy supply chain inefficiencies are reflected in a relatively large difference between farm gate milk price and consumer prices of milk products. Factors like the dependency on imported milk powder and the strongly fluctuating world market prices, the lack of protection against world market fluctuations for the local milk producers, the scale and structure of dairy farming, and poor raw milk quality affect the development of East Java dairy supply chain.