Pick out fabric that you'd like to use. I chose this cute Japanese import with little girls. Fabric with animals or other people work well also. Many of the Japanses imports have a small scale to the design.
Cut out the pieces you'd like to use. Don't worry about them being perfect. I made these into small circles, but depending on the scale of your "dolls" you can stitch them around the body shape.
Pin them to a felt backing. This will give them a little bit of structure [stiffness] and help them stand up better. [any thick-ish material will work]
Sew around your dolls. Make sure to leave an opening so you can turn them right side out and stuff them.
Turn your doll right side out and stuff. I like to use bamboo stuffing. It have a great shape and feel to it inside children's toys. Any polyester, cotton or bamboo stuffing will work though.