Remove everything from the towel closet and evaluate your towel stock. Sometimes mess results from hunting for missing items. A minimum of two bath towels, hand towels and wash cloths per family member lets one set be in use while the other is laundered and stored.
Choose the system you prefer your family to use before buying bins or baskets. Some families color-code towels and wash cloths -- one color for parents and a different color for each child. Others take an open-stock approach: towels and wash cloths are a single color for the whole family.
Purchase bins or baskets that fit your shelves and are large enough to hold at least one color-coded towel set per family member. This system works particularly well in families with several children. Which towels belong to which family member remains crystal clear: Ben's towels are always blue, Kathy's are yellow, Jeremy's are brown and Mom's and Dad's white. How the colors fit into your decor is another challenge. Label baskets with family member's names to reinforce the sorting.
Create an open-stock system by allocating one type of towel to each bin or basket: all washcloths in one basket, all hand towels in another and all bath towels in a third. In families with teens or older children, the person who empties a basket runs a load of whatever is now gone. Towels can be all one color or a mixture in an open-stock system. Labels for the baskets are optional.
Set up mini-hampers or big baskets for special-use towels. These categories include guest towels, beach towels or scrap towels for household cleanup. Getting them out of the main stream of towels used daily will cut down on mess and confusion. If you keep cleaning supplies or bath soap in your towel closet, provide containers for those as well and store them on either a high shelf or on the floor, away from the towels.