A transshipment model of the Northeast dairy sector is developed to assess the potential for structural change in the manufacturing industry. It is detennined that the reduction of existing hard product processing capacity near metropolitan areas would diminish total costs. Industry-wide savings of about 60 million dollars annually would be realized by fluid, soft product, cheese and butter/powder manufacturers. The model points to finn level as well as industry level incentives to move toward a more concentrated dairy manufacturing sector in the Northeast.