I just found out our first game this weekend is against the same team that started this whole discussion. I hope they have improved.
I would talk to the other coach and tell him/her that you are treating the whole game like a scrimmage and put your weakest batters first in the batting order, have them play the most important positions, start your 3rd or 4th pitcher, have them practice switch hitting, etc.
I have a problem with the umpire telling you to call off the dogs "or else". IMO its none of his business, he is there to enforce the rules period and should not threaten your team.
Good luck this weekend! Let us know what happens.