This configuration enables you to set how many items are allowed in a shipping package, and by extension, how many shipping packages will be generated for this order.
For a regular SKU (i.e. not a Kit):
For example, sku "ABC" can have a max quantity value of 1. Therefore, if an order comes in for "ABC" with a quantity of 3, three shipping packages will be generated.
For a Kit: (This option is not available for Independent kits)
Aside from the the Max quantity per Package, kits have an additional package configuration - Number of Packages. With this setting, you can set the number of packages needed for shipping this kit and assign the components to a package. For example, if Kit 123 consists of 2 components, you can create two packages and assign one component to the main package and the other component to Package # 2. Now, when an order comes in for Kit 123, two packages will be generated.
However, this setting only generates packages according to the SKU, regardless of the order quantity of each SKU. This means that if 2 Kits 123 were ordered, the package quantity would still be 2, with both quantities of one component in one one package and the other 2 items in the 2nd package. To set a separate packages for each individual unit (as in our example):