It allows you to create a playlist on your iPod (otherwise playlists are only created in iTunes). This can be useful if you are out away from your computer and you have an inspiration for a playlist, say songs that you can actually hear on the subway. You add them to this on-the-go playlist. Once back in iTunes those songs are grouped together in the same playlist which you can not move to a regular playlist, say called "Subway Tunes". Then you can remove them from the OTG playlist and it is ready for your next inspiration (e.g. songs that make me start crying).
Patrick