What are the steps involved in automatic creation of PO's?

Steps to Create Auto PO as follows:

Check Auto PO button in purchasing view of Material Master Record.
Check Auto PO button in purchasing view of Vendor Master Record.

The Above settings are to make Auto PO from PR.
Not for Auto PO at the time of GR.
Both the Concepts are different.

Spro -> MM -> Inventory Management and Physical Inventory -> Goods Receipt -> Create Purchase Order Automatically
If you put tick for Auto PO against Mvt type.

Then while doing MIGO, you can create PO in the Back Ground.

For AUTO PO

You created purchase requisition for various material. During creation of purchase order you used the following path: 

Purchase Requisition 
........Follow on function 
.........Create Purchase Order 
............automatic via purReq. 

When you mentioned required purchase requisition number and execute, system give error that purchase requisition does not contain any suitable item. 
 

Is there any setting in customization where you can monitor and use that function?

In an effort for you to successfully use the Transaction Code ME59 to automatically convert the current PR into PO, then the following criteria should be met: 

1) In the Purchasing View of the material master data, the "Autom. PO" field must be clicked; 

2) In the Purchasing View of the Vendor Master Data, the "Automatic Purchase Order" field must be clicked; 

3) The Outline Agreement or Purchasing Info Record shall be maintained which will allow the automatic copying of unit price and other conditions into PO; 

4) The Source List shall be maintained for the nominated vendor which was shown in either the Outline Agreement or Purchasing Info Record. 

or 

It might be PR subject to release strategy and not yet released 

or 

If you're not using a source list or automatic creation of PO, you may need to assign the requisition to a purchase information record using transaction ME56. Then it should appear in ME58.

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