Dad's wife sounds like something else!
OP, I can see why you and your fiance want to get a head start on figuring out how to deal with her in this issue.
I get the feeling that she really wants to be called "Grandma" (as the other grandchildren do) and she's going to push for that specifically. (Pushing it on a six-hour-old baby, for goodness sake!) So if you're determined to go another route, that's going to be hard.
What about taking a reverse approach? Now, this is not to put down anyone who thinks differently, this is just a spin that might help you guys deal with the situation. "Grandma" is kind of a generic term, right? So maybe Dad's wife could be "Grandma" if that's what she really wants. And maybe a special, personalized name could be found for Fiance's mom, and your mom. They could be the ones who are Cookie or G-ma (pronounced jee-ma) or Lala or something like that. Maybe something the child chose, or something special they chose, rather than the generic label that gets applied to anyone.
Then Dad's wife doesn't make trouble (on that score, anyway) because she's gotten what she wanted. But you guys secretly know that it doesn't mean anything--it was a concession that cost you nothing. Saves you years of correcting children and trying to counteract her "propaganda" and her complaining to people that you won't let her be called grandma. Because a title like that is really what the person makes of it, you know? If somehow she turns out to be an awesome grandmother figure to your kids, great, she's "Grandma," that's fine. If she's overbearing and condescending with your kids, during the few supervised times she gets to see them, they'll naturally distance themselves from her on their own, and it'll be like, "Oh, yeah, Grandma. Hey, when are we going to see Cookie next?"