How we can handle sub-departments when using document sets

SharePoint doesn't natively support creating sub-document sets within a parent document set through the UI. However, there are some workarounds, but I never tried those options:
https://learn.microsoft.com/en-us/answers/questions/1811109/can-we-create-document-set-within-another-document

According to my knowledge, you can follow below two options if they fully meet your requirements:
Creating Folders within Document Sets: You can create folders inside a document set to organize content for sub-departments. This approach maintains a hierarchical structure while working within the limitations of SharePoint.

Separate Document Sets at Parent Level: Alternatively, you can create separate document sets for sub-departments at the same level as the parent document set. This keeps each sub-department's documents organized while providing flexibility in managing permissions and metadata.

Best Regards,

Viren