Decide what figures you want in your Nativity scene and cut a block for each figure. Sand the blocks well, especially if little ones are going to be playing with them. Round the corners for safety as well.
In addition to Mary, Joseph, and Baby Jesus, you may want Wise Men, shepherds, sheep, an angel, and other animals. Copy simple drawings and cut the shapes from felt. Glue to the appropriate block. You can layer the felt or add the other materials for details.