At this age, there is really no need to go into detail about how babies are made - simply telling your three year-old that he came from your tummy will be enough. If he seems to be more curious, then find out exactly what he wants to know by perhaps asking him what made him ask that question. It could very well be that his friend’s little sister came from hospital, and he simply wants to know if this is true or not. Then again, it could be that he saw a movie on TV and wants to know if babies really do come from a cabbage patch.
Above all, do not become flustered when your three year-old asks you this question - your preschooler will pick up immediately that you are uncomfortable with his question. Simply give straightforward matter-of-fact answers this will make it easier for you and your child when he comes to you with more advanced questions on sex later on in life.
If you wait for an appropriate moment, then you could get onto the subject with your child before she asks you. For instance when your child sees your friends new baby, or your friend nursing her new baby, or perhaps a baby animal at the zoo - these can all lead to discussions about where babies come from.