What we ended up doing was:
1) Set an admin password for the Location
2) On the Deployment & Defaults tab pick that login in Agent Deployment Settings
3) On our template to enable the cache, set Cache Directory to %drive% and Cache Username to %adminusername%. Cache Password I believe was %adminpassword%.
4) On the Location's General tab, set the Drive field to: \\SERVER\CacheShareName$|B
...the "|B" says to use drive B. LabTech will start at the drive letter and go backwards until it finds one available, wrapping around if necessary. We found no PCs used drive B.
The mapped drive is shown as "disconnected" unless hidden so we do this on domains where we set a group policy to hide drive B and that has a domain admin password we can use. (hint: don't use the only domain admin login, and then change its password, since when the agents try to connect with the old password they will cause the account to lock)
No, I don't know why LabTech uses a mapped drive. Since the files are copied locally before use, it seems to me the drive letter is unnecessary.