Tool wear is one of major causes occurring defectives in NC machining. In this paper we developed an automatic tool compensation system for the NC lathe machining. The system compensates machining error without any help of operators whenever the specification of a part is out of a tolerance. The configuration of the automatic compensation system consists of a NC lathe, an autoloader, a sensor, and a PLC. The system is operated as follows. A workpiece loaded by the autoloader is machining on the NC lathe. Once the workpiece is machined to be turned to a part, it is moved onto the sensor to be measured. If the sensor detects a part out of tolerance, a tool compensation is made in the NC controller. The system gives a help in increasing the productivity by reducing occurrence of defective parts as well as by eliminating time for the tool compensation. Besides the productivity increase, the system calculates cumulative usage time of the tool and notices the tool replace time to a worker by an alarm signal. A case is introduced to show that the system can be applied effectively in a shop.