My ex-SIL had a horrible divorce. It wasn't like your step-kids' bio mom's situation; my ex-SIL did not have any addiction or mental health issues, but she was the victim of a cruel and manipulative man who orchestrated a divorce where she lost everything, even custody of her children. The evil man married the teenage babysitter, who viewed herself as the guardian angel/rescuer/goddess who would raise these children as her own. If I hadn't witnessed it, I would not have believed it. He kicked my ex-SIL out of their house, made up outrageous (but very plausible and well-rehearsed and smoothly delivered) accusations. I think if he had told the judge that the sky was green, he could have done it in such a way that the judge just might have thought "hmmm, perhaps I have been misled all this time and the sky actually is green".
It broke my ex-SIL's heart. She had no money, no home, and at Christmas my dh and I would buy stocking stuffers that she could give to her kids (we lived far away from her so I couldn't just take her shopping). She watched this new wife happily buying clothes and toys for the children and cried because she could just barely afford something from Goodwill. (Her sisters and my dh and I pitched in to help her get food and an apartment).
It broke her heart again to see them wearing things that her ex and the new wife bought them, which were always extravagant. She'd say "have you worn that sweater that I got for you (at Goodwill)?" and they'd say "no, [new wife] took us to the mall and got us all new outfits at Macy's, and new iPhone cases and these awesome boots". They didn't realize how deeply that hurt her and how she longed to buy them things, and take them out for ice cream, and just make supper for them or breakfast, and wave to them as they got on the school bus, but instead of a tantrum, she told them how cute they looked, and then cried herself to sleep at night. It took every ounce of control that she had.
Sometimes, we'd send her fifty dollars for groceries, and we'd find out that she went hungry and instead spent the money on cheap useless things for the kids, like flip flops, small pads of paper, anything just to feel like she was connecting with them. It gave her joy to give them something, because, as she told me, she couldn't give them hugs at night, couldn't give them a warm meal, couldn't give them her time, because those little things that we moms often take for granted had been taken from her. Your kids' bio-mom may be feeling responsible or guilty because she knows that her addictions and actions caused her losses.
So I'm just saying, perhaps this bio-mom just doesn't know how to connect, and feels like giving her kids things, even if they're the wrong size or they're not needed, that she's done something that any mother would: buy clothes for her kids.
So maybe you can guide her bio-kids into a different kind of exchange with her. Rather than dollar store clothes that don't fit, maybe they could get into exchanging drawings or sketches. Have the bio-kids make her some artwork or color her a picture, and ask her to draw them something for next time. It will perhaps help her feel that connection without purchasing junky stuff or ill-fitting stuff. Maybe instead of buying stuff, she'll draw them something. Maybe another type of craft might be better (pipe cleaner flowers, etc). In other words, gently and subtly guide the exchanges so they consist of fewer ill-fitting clothes, and more meaningful expressions. They could even write a story together. During each visitation they could each work on just one paragraph, and save the next paragraph until the next visitation. Or they could take turns writing one line of a poem. The kids write one, the bio-mom writes one, etc.
My ex-SIL was very aware of how her kids' lives were passing her by, and it somehow gave her comfort to know that a cheap piece of clothing that she gave to them was in their dresser drawer. She knew it was cheap and probably didn't fit, but all around her she'd hear other moms, in line at the bank, or at the grocery store, complaining "oh, I've got to take little Genevieve shopping AGAIN. That girl is growing so tall her pants just look ridiculous" and my ex-SIL would sob herself to sleep, knowing that she couldn't do that, and how desperately she wanted to do the normal mom things. She didn't want to take them to Disneyland or buy them a pony. She wanted to make them a grilled cheese sandwich after school. She wanted to see their school supply lists and join all the other moms in Walmart, buying pink erasers and 24 #2 pencils. Hey, maybe you could give her a portion of the school supply lists, like the ordinary crayons and boxes of tissues, and ask her to provide some of that. You can take the kids for the more personal items like backpacks, binders, folders, etc, but really, crayons are crayons, and the tissue boxes will get thrown in with all the others in the supply closet, so if she buys purple tissues in a dented box, who cares? And you could perhaps have your husband tell her that the kids need _____ (new pencils, shoelaces, pony tail holders) and next time she wants to buy them something, that would be a good suggestion.
This is just off the top of my head, having seen it from the perspective of a close relative of someone who lost custody of her children.