How do you make playlists?

I believe, and someone correct me if I’m wrong, that you can leave the songs on the player. When you sync the playlist, you should see “Already on Device” during the sync process.

 

When I try to make a playlist, WMP11 tells me I have to do it from the “Sync” tab. 

When I attemt to make a playlist from the sync tab, it allows me to drag and drop, but the “save playlist as” option is always grayed out.