There are many articles discussing the specifics of how the configuration settings are applied including the differences between SSIS 2005 and 2008 version implementations, however this topic keeps resurfacing on MSDN’s SSIS Forum.

I thought it could be useful to cover the logic aspect visually.

Below is a diagram explaining the basic flow of a variable setting for a case when no parent package is involved.

As you can see the run time stage ignores any command line flags for variables already set in the config file, I realize this is not stressed enough in many publications.

Besides, another interesting fact is that the command line dtexec tool is case sensitive for the portion following the package keyword, I mean if you specify your flag to set a new value for a variable like

dtexec /f Package.dtsx -set \package.variables[varPkgMyDate].value;02/01/2011

(notice the lover case v in .value)

You will get errors. By capitalizing the keyword the package runs successfully.