Set dressing is a term that comes from theater and film and entails decorating a particular set with curtains and furniture, filling shelves and generally making it look real and lived-in. In the world of animated movies and video games, you must accomplish the same tasks with your virtual sets.
This means that after creating your base set geometry (a creature-infested subway, child's bedroom, etc.) you can then go in and populate the set with appropriate models in order to add realism. This could mean adding boards and barrels to the subway tunnel or a shelf full of toys and books in the bedroom.
Know The Set
Depending on the studio environment and pipeline the final look of the set is commonly determined by artwork. Modelers should adhere as closely as possible to the artwork to determine object placement, but it's also a good to have an idea of the purpose of the set and who or what inhabits it. Knowing the subway set you're putting together has been taken over by nasty little creatures will inform your set dressing choices in areas that may not be explicit in the artwork.
When dressing your sets also think about leaving objects slightly off kilter. Objects in the real world are rarely perfectly aligned so make a pass across your set, moving and rotating objects slightly to add an amount of realism that is appropriate to the project.
Referencing Your 3D Models
Whenever you add props and dressing to your sets, a potentially huge problem is created. What if any of those individual objects need to be modified? Perhaps you've spent days populating a post-apocalyptic library with scattered books and now the book models need to be changed. Due to time constraints it's not realistic to replace all of the books manually so an asset management system is often used.
Different applications may use the words "assets" or "references", but generally these systems allow you to import a model from a separate file and place it into your scene as set dressing. The application is reading the data from an external file so any changes made to the original file are populated throughout your scene. Some studios may also have their own proprietary asset management systems that allows artists to publish or place different asset versions into sets.
Set dressing is a vital last step in modeling finished, believable sets for all kinds of animated 3D projects. Make sure you're considering these concepts and techniques next time you need to populate your scenes in a realistic way. If you want to learn more about set dressing check out Set Dressing and Design in Maya, and continue growing your skills with the hundreds of other 3D modeling tutorials.