You have not mentioned breed type, but, whatever breed, I think that they should have more space than just one crate. Do you have an Xpen, or some pickets and garden fencing.
Our litters, from when their eyes open and they start climbing out of the whelping box, sleep in the crate, with the door open, and they play, poop and pee in a pen.
You can still reduce the size / number of pads going down until they learn to toilet in one area.
I think if you let them toilet in the crate you will be teaching them it is ok to mess in their sleeping quarters.
Our litters, from when their eyes open and they start climbing out of the whelping box, sleep in the crate, with the door open, and they play, poop and pee in a pen.
You can still reduce the size / number of pads going down until they learn to toilet in one area.
I think if you let them toilet in the crate you will be teaching them it is ok to mess in their sleeping quarters.