I separate scraps by fabric type (flannel, quilter's cotton, homespun, etc.) and also by design type (children's, florals, holiday, batik, etc.) and also by color. I store pieces smaller in a FQ in plastic shoeboxes with labels. They stay pretty flat that way. I don't cut them up until I'm ready to use them, but sometimes that means there is so much to cut that I don't get started, so I can see the benefits of both systems.