Tuneup,
First, details on when tags are updated: As far as I know, tags are updated when you change them in MC's Library. As long as the option is checked to make this happen, it happens as you change them. Change an Artist's name in the library and seconds later MC will write that change to the tags. The "master switch" to enable/disable this is at: Tools > Options > General > Importing & Tagging > Update tags when file info changes.
You can do this manually with Library Tools > Update Tags (from library), as you have discovered. *That* tool, as with almost every MC tool, operates on the FILES YOU HAVE SELECTED at the time. If you want to update the whole library, you'll need to select all of your files in a view that can show all of them.
Rename, Move, and Copy is a powerful tool that does several different types of jobs. I recommend that you do some combination of playing with it and reading through the long (but good) wiki article on it.
http://wiki.jriver.com/index.php/Rename,_Move,_and_Copy_FilesOne of the things it's designed to do, is to let you rename ALL of your media files to a consistent naming convention. You build a template of what metadata is used in what places in the file and directory names, then tell it to run, and it renames your files appropriately. This tool also operates on the files you have SELECTED, when you open the tool. Which is very convenient actually.
I recommend you do some experiments with small groups of files to figure out how it works, and build a template that works for you. Then run it in batches. Make sure to account for things like Multiple Artists albums and (importantly) multi-disc albums. Figure out how you will name files from multiple discs in the same album.
Oh, and read up on the "move all files in directory" option. You probably want to use that.
Good luck to you!
Brian.