Switching bigger divisions to smaller seems to be affecting multiple countries with low manpower. It is possible that is what's driving the AI, but the catch is, switching to smaller divisions is, if anything, counter-productive and isn't going to help the AI in the slightest -- 2 trash divisions aren't going to perform any better in combat than 1 normal division holding the same amount of men. To the contrary, they'll be swept aside by anything resembling a regular combat unit.
Yet if AI controlled troops are fixed in the pathing they can finally have an organization and an entrenchment instead of travelling strategic + constantly switching fronts. So if Pod has found the problem many things will change for the better.
The pathing IS a big issue with the front lines shifting (and dozens of units moving unnecessarily) but you can see it even with normal player movement. After beating Greece, I added 2 divisions from the Italian army to the Libyan army (which is in Garrison state, not having front lines or orders). Well Greece is full of ports and these 2 divisions moved from Greece to Southern Italy and then took the ferry in Sicily to reach Libya... it's as bad as that.
Just look at the italian army if you select the 17 divisions at game start, form the army and then issue a garrison order in Piemonte, Lombardia, Veneto and Istria, you'll see the divisions in Piemonte move to Veneto and vice-versa. Whatever factors are being computed, all divisions are the same and mathematically an infantry div that camps in Veneto has the same values as a Div camping in Piemonte.
To prevent further useless movement to garrison front lines we could really use an option that prevents an army to autoupdate its front according to another army's conquests.
Example here
5 div army front line auto-merged with 20+ army conquests. That pulls those 20 AND those 5 into a single army which is NOT what we want to happen (those 20+ don't need to "mark" the 5 div army front line because it messes up with its own plan. When that happens it's a hell of a problem (and it happens all the time).