Power supply decoupling basically refers to filtering the supply at the point where it is used. This is to eliminate some ripple, transients from other components in the system switching, noise on the supply etc, from reaching a particular component (usually an op-amp, micro, etc). To do it, you place a small value capacitor physically as close as possible to the device you want to decouple. If you look at a modern board, you will usually notice a tiny cap sitting right next to each IC on the board, those are the decoupling caps. Typical values are 0.1uF.
In other word, the idea is to create a low inductance path for high frequencies from VCC to GND. Smaller physical capacitors are better because they have a lower internal inductance.