Olive is being the alpha and she is "protecting" you from your wife and daughter. I would get her fixed as soon as possible, pancreatitis, can be genetic, and that with aggressiveness indicates this dog shouldn't be bred. We have an abundance of pets right now, why would you want to breed her once; it's not good for her in any way. Hormones in female dogs can also promote aggressiveness. I disagree with your vet that the kennel should be used as punishment, but I do think you need to read up on training and how to teach Olive that the humans are in charge not her. Many people suggest the "Nothing in Life is Free" approach, see this site for more information:
http://www.cairnrescue.com/docs/NILIF.pdf