This paper is focused on developing a compensation module for reducing the thermal errors of a computer numerical control (CNC) milling machine. The thermal induced displacement variations of machine tools are a vital problem that causes positioning errors to be over than 65%. To achieve a high accuracy of machine tools, it is important to find the effective methods for reducing the thermal errors. To this end, this study first used 14 temperature sensors to examine the real temperature fields around the machine, from which four points with high sensitivity to temperature rise were selected as the major locations for creating the representative thermal model. With the model, the compensation system for controlling the displacement variation was developed. The proposed model has been applied to the milling machine. Current results show that the displacement variations on the x- and y-axes and the position error at the tool center were controlled within 20 µm when the compensation system was activated. The feasibility of the compensation system was successfully demonstrated in application on the milling operation.