That works, but it doesn’t keep the iTunes xml file in the same place as the music. So you’ll have to copy the “iTunes Music Library.xml” over to the slug.
Otherwise, that would work okay.
You could maybe use a batch file as a startup or shutdown script to copy the xml file, or perhaps run it as a scheduled task.
If you could get the .xml file copied over there periodically, then you be able to manage playlists on iTunes and have them reflected on the slug.