BIG SPOILER below:
Oh, I think it's clear why Cheech doesn't want Olive to open in the role. It's just that he makes a very sudden change from thinking Olive is bad but tolerating her to killing her. Especially since not long before he decides to kill her it's clear that he has not even thought of that or he wouldn't be warning Warner to stay away from her, which become a huge point here because it gets a big number. He has not been ordered to warn Warner. This is something he decides to do because he thinks Warner is important to the show (also a point that is not so clear here).
It doesn't help that Warner doesn't seem like he's necessarily such a great actor here. Jim Broadbent is as funny as can be — if anything, funnier than Brooks Ashmanskas, but he's given better moments to be funny, and the camera helps — but he also conveys that this man is a very good actor. Which is why David insists on him, despite the warning from Julian that he will gain weight.
Although this comes later, if anything Warner is made to seem like a sort of bad actor here, someone who plays baldly to the audience and can't stay focused and in the moment when surprised by audience laughter.
But as William Goldman wrote about Mame, some musicals aren't meant to make sense. They're just meant to entertain.
One thing that Allen has done to try to clarify things — perhaps to make up in part for no longer having the understudy go on before opening — is to make it clear that Olive did not get good reviews. But even that is muddied by the retention of lines from the film about the audience accepting Olive well enough (and Cheech's very smart comeback that the audience knows something is wrong, even if they don't know what or why, but even Cheech does not dispute that the audience is not strongly aware that Olive is atrocious).
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