Here's what we do in our house:
Beginning of Dec we set up the fields of "Bethlehem" which is an area of white wool with little wooden and wool sheep on it that we already had. We made 2 shepherds from wooden unfinished peg people and the have little sheepskin scrap clothing (which I got a small bagful of for a few $ in a Waldorf store). They have little sticks for crooks. In the corner of the Bethlehem fields is a stable. Last year it was made from sticks stuck into playdough and then had a bird's nest opened up over it so it was sort of "thatched" looking. The bird's nest had some white fuzz woven thru it and it looked like snow on the roof. This year's stable is a cave made from rocks propped up together. Around the fields we place pretty rock piles or pinecones for trees or "real" evergreens which are little branches anchored into some pladough which has been left to harden. DD who is 3 loves to play with the Bethlehem scene.
Also beginning Dec 1s't Mary and Joseph (again made from peg people) begin their "long journey" around the house from Nazareth to Bethlehem. They will arrive on Christmas eve. On Christmas AM when dd wakes, she'll find the baby Jesus in his manger (a 1/2 walnut shell with hay glued into it which the sheep currently eat out of). Baby Jesus is an itty bitty wood peg person wrapped in wool. She'll also find angels (made from wool and ones we got at a Waldorf fair made from white feathers) hanging above the fields. Oh, and of course a star in the "sky". Everyone will be gathered around to worship the baby Jesus.
We just began this last year and dd is delighted to find where Mary and Joseph are each AM. However she asked me why the travel at night instead of sleeping at night, so now I have to be more sneaky lol. She knows we make them "travel" but it's always a mystery/suprise when.
We'd like to make a donkey for Mary to ride on and the 3 wisemen to travel beginning on Christmas and arriving on 3 king's day. Hoped to do so this yr but we just moved so not sure we'll get to any more. Maybe next year. It's so fun making it all!!!