Milk production has been identified as the best option for smallholder farmers in the Central Highlands in Mexico to face the market pressures. However, dairy in Marcos Castellanos faces problems to cover production cost, currently mainly related with feeding. In this study, feeding and herd strategies were optimized in order to evaluate to what extent those are responsible for the current low gross margins of the farms and the feasibility to decrease the reliance on off purchased feeds. For that purpose, a linear programming model integrating the livestock and crop subsystems and the inputs available in the region was built. Three farm types in two areas with different productivity were described and evaluations were carried out for two milk production strategies (constant or non- constant production across the year) and for two objectives (margin maximization and purchased feeds use minimization). Goal programming technique was use to obtain a compromise solution between the objectives. Later on, the same model was parameterized to explore the impact on the gross margin of improving the genetic merit of the cows and increasing the success on the insemination services. Results suggest that dairy is a potentially profitable activity in Marcos Castellanos; current poor economic performance can be improved by designing diets matching temporary available resources with animal requirements through a proper calving management and investing on increasing productivity of the farms. The dissimilar productivity of different areas in Marcos Castellanos compromises the design of feeding strategies. The decision of growing on farm feeds and the dependency on external inputs depends on the relative cost of the energy (MJ) and protein (kg) of the external and on the on- farm produced feeds, the availability of the feed across the year and the digestibility of the pastures.