To color up means to exchange lower denomination poker chips with the ones of a higher denomination. This practice happens in tournaments, and in larger events, it can happen a few times throughout the tournament.
For example, you may start an event with chips of 25 denominations in your stack. At the first break, these chips are removed through the color-up process and replaced with 100 denomination chips. This happens when 25 chips no longer have a purpose, i.e., they won’t be needed in future levels.
All odd chips that can’t be directly exchanged are added to the chip race. So, if you have two 25 chips left over after coloring up, and two more players have one each, the tournament director will deal one card for each chip, and the player drawing the highest card will get the full amount (100).
The color up procedure in poker tournaments exists to reduce the clutter and make things run smoother. Keeping all small denomination chips in play once they’re not needed would be very inconvenient as players could have a pile of chips in front of them by the final table, and all 25 chips put together (for example) don’t constitute even a single big blind.