This paper proposed a error compensation methodology for three-DOF translational parallel manipulator. The proposed method uses CMM (coordinate measuring machine) as metrology equipment to measure the position of end-effector. To identify the transform relationships between the coordinate system of the parallel manipulator and the CMM coordinate system, a new coordinate referencing (or coordinate system identification) technique is presented. By using this technique, accurate coordinate transformation relationships are efficiently established. According to these coordinate transformation relationships, an equation to calculate the compensating error components at any arbitrary position of the end-effector is derived. In this paper, Monte Carlo simulation method is applied to simulate the compensation process. Through the simulation results, the proposed error compensation method proves its effectiveness and feasibility.