Dairy farming is a critical component of smallholder livelihoods in Ethiopia. To fully harness its potential, it is imperative to adopt improved management practices, enhance milk handling and processing methods, and develop efficient and accessible marketing systems. This study aimed to assess and monitor dairy cattle husbandry, milk handling, processing, and marketing practices in Dejen District, located in the Amhara Region of Ethiopia. The study area was purposively selected due to its significant potential for milk production and utilization. A stratified sampling approach was employed, and a total of 186 dairy producers were randomly selected for the household survey. Additionally, 45 crossbred lactating cows—15 from each of the rural, peri-urban, and urban milk production systems—were purposively selected for a monitoring study conducted over eight months. Data were collected using a pretested semi-structured questionnaire and supplemented with key informant interviews. The findings revealed that both local and crossbred dairy cattle were kept in rural and peri-urban systems, whereas urban production systems exclusively maintained crossbred cows. The primary feed resources included natural pasture, crop residues, non-conventional feeds, commercial concentrates, and improved forages. Feeding practices varied, with 41.4% of farmers combining stall feeding and grazing, 38.2% using stall feeding alone, and 20.4% relying solely on grazing. Regarding breeding practices, only 1.1% of producers used artificial insemination (AI) exclusively, 27.4% depended on natural mating, and the majority (71.5%) used both AI and natural service. Water for livestock was obtained from various sources, including wells, tap/piped water, rivers or streams, and ponds. Milk yield data showed that local cows produced an average of 1.81 ± 0.24 liters/day in peri-urban areas and 1.32 ± 0.39 liters/day in rural areas. For crossbred cows, average daily milk yields from the survey were 10.16 ± 2.18 liters (urban), 8.32 ± 2.05 liters (periurban), and 6.93 ± 1.63 liters (rural), while the monitoring study recorded slightly higher values: 12.24 ± 4.21 liters (urban), 10.05 ± 3.21 liters (peri-urban), and 8.00 ± 2.60 liters (rural), respectively. All dairy producers practiced hand milking. In terms of milking containers, all urban and peri-urban producers used plastic containers. In rural areas, 84.2% used plastic containers, while 15.8% used traditional gourds. Similarly, plastic containers were predominantly used for milk storage across all systems: 100% in urban, 98.6% in peri-urban, and 77.2% in rural areas, where the remainder used clay pots. All respondents reported processing milk into various products. In urban and peri-urban settings, 87.5% and 64.2% of milk were processed for household consumption, respectively, while in rural areas, 50.5% was processed primarily to extend shelf life. Milk churning was done using clay pots by 81.3% of urban, 92.8% of peri-urban, and all (100%) rural producers. Boiled milk was the most commonly consumed form (75.3%), followed by a combination of boiled and raw xiv milk (8.6%), and raw milk alone (0.5%). The marketing of raw milk and butter was widespread. Local dairy cooperatives, such as Gion and Yetnora, produced a variety of dairy products including butter, skim milk, yogurt, cottage cheese, and whey. Yetnora cooperative also produced mozzarella and provolone cheeses. Key challenges identified included low milk prices (index values: 0.35 urban, 0.27 periurban) and high feed costs (0.28 urban, 0.21 peri-urban). In rural areas, the primary constraints were limited market access (0.21) and disease prevalence (0.19). Despite these challenges, the study also highlighted several opportunities for dairy development. In urban and peri-urban systems, the main opportunities were the presence of dairy cooperatives and market access (index values: 0.49 and 0.42), favorable environmental conditions (0.28 and 0.40), and access to veterinary services (0.23 and 0.18). In rural areas, favorable environmental conditions (0.72), access to dairy cooperatives and markets (0.24), and veterinary services (0.04) were noted as key enablers. In conclusion, Dejen District possesses strong potential to serve as a milk and dairy product supply hub for markets such as Addis Ababa and Debre Markos. However, this potential remains underutilized due to suboptimal husbandry practices, inadequate milk handling and processing methods, and underdeveloped marketing systems—especially in rural areas. It is therefore recommended to promote improved dairy husbandry practices, enhance milk handling and processing, and strengthen linkages between rural producers and consumers or dairy cooperatives to improve market access and overall productivity.