My son and I did this several years ago (he was probably 5). I had some scrap fabric laying around (imagine that!). He arranged the fabric squares and I simply stitched them down with him on my lap.
He enjoyed arranging the fabric and then later playing with the finished blankie.
This little cutie is by my daughter (again several years ago-8 years old?), sewn from scraps. I love him! The fabric actually looks like he has a mustache!