ODI allows to create short-cuts to objects.
"Generate scenario as if all underlying objects are materialized" check-box will generate the scenario as if the short-cuts are real objects.
See link below for details:
If you are not using shortcuts (probably you are not), you should not worry about it. But if you want to understand how shortcuts works and how it is affected by generating scenarios, you may take a look here: https://docs.oracle.com/middleware/1212/odi/ODIDG/shortcuts.htm#ODIDG1484