The development of a smart sensor is proposed to improve the thermal error compensation model of a multi-spindle automatic lathe. The smart sensor is capable of gathering real-time information about rotating spindle drum temperatures. Thereafter, the temperature obtained by the smart sensor is applied as input to the thermal error compensation model based on the transfer function instead of an indigenous temperature measured on the stationary part of the multi-spindle automatic lathe. Using spindle drum temperature as the model input increases the prediction of thermal displacements in the X-axis by 16%.