The disguise generator is exactly that: it is the gadget built into the console that generates disguises for agents. If agents need to switch disguises in the field, they will use their Disguise-Outfitting Ryticular Kostume System instead. The disguise generator systems were invented by Makes-Things.
Disguises are necessary for most missions to aid the canon in cloaking the agent from the sight of the Sue. Forgetting your disguise or using an inappropriate one leads to bad things, especially if the canons are in character enough to attack a "hostile" disguise (this happened a few times in TOS, for example, when Jay and Acacia found themselves attacked both by the Sues and the canon characters due to using enemy disguises, such as Ringwraiths or Uruk-hai).
However, despite the drawbacks, using enemy disguises is usually a better idea than using "friendly" disguises (such as an elf in Middle-earth). PPC agents inside a continuum disturb the continuum simply by their presence, and should stay as canonical as possible to avoid damaging canon more than the Mary Sue already has. Since most Mary Sues are "good" characters, it is more canonical for an agent to use a disguise that would plausibly kill a good character in canon. Most assassins will also use canonical weapons or other in-canon execution strategies to kill a Sue—not only is it satisfying to kill a Tenth Walker with orc arrows in Uruk-hai disguise, it's also a way of keeping the canon as intact as possible.
Being seen without disguise by a Sue makes the assassination much more difficult, as it becomes much more obvious that you're not just another background canon and it subsequently gets more likely the Sue will either try to escape or attack. Even the weakest Sue can be a threat to PPC agents with the right resources or incentive.
The disguise generator actually transforms agents' bodies into a person or a creature of their choice, without affecting their mind or behaviour. This is demonstrated in TOS when Jay and Acacia use the disguise generator to became orcs or even Ents, and in the latter case they were invulnerable to arrows. However, not removing an arrow before going back to HQ was a bad idea that resulted in a trip to Medical for Acacia.