Here my own stuff I posted on inventory a while back. Old, but nothing that needs major changes comes to mind from looking at it.
Spoiler 3.3.1 Capacity
The ability to carry items would depend on strength and containers. Containers include bags, packs, boxes, and the like. The number of containers a character could carry varies with strength and basic physics; you can’t wear 30 backpacks no matter how strong you are. Each container has its own weight and item limit. Item limit is not direct number of items, but a measure of size. An axe is much larger than a potion. A bag with 50 item capacity might hold 50 1-unit potions or 5 10-unit axes, but if one load is particularly heavy, it won’t be able to carry more even if it has space. A character could carry up to 4 containers, but only if their combined weight is within their strength’s ability. If necessary a fifth could be directly carried in the character’s arms, but naturally it would have to be put down for combat or other hand-requiring events. A tab could be selected on the inventory screen to view all items in one group, or separate them by container. Horses or purchasable pack animals would be able to carry multiple containers. Many varieties would exist, both in make and material, with their own features. A bag made from a rare, strong leather, for example, could have greater weight capacity than a cheaper bag of the same type. Most containers could be hand-made through the Crafting: Stitching skill, while crates could be made through Carpentry, and Forging can craft secure safes for in-home storage.
Characters would have other options in item carrying. Up to three weapons could be held on their back, both for transportation and quick access. Larger weapons would occupy two of these slots. Arrow quivers would count as one. Also vital is the belt, many varieties of which can be bought or made. The belt can carry two weapons, though they must be 1-handed. It can also carry a number of small items, which the exact number of slots for would vary between belts. These small items include potions, throwing knives, tools, and so on. The belt translates to speed in item use. Swapping out weapons carried on the back/belt is immediate, as is drinking potions or throwing objects. While the action would pause in the inventory screen, using items from containers would come with a delay. Characters expecting conflict would need to make sure their desired supplies are ready and at hand, or be able to find cover to safely rummage through their packs. Equipment carried in this fashion is visible, and can carry an intimidation/recognition factor for some. Fighters bristling with weaponry may find themselves more easily getting their way.
When wielding concealed weapons, they can be “equipped” to articles of clothing to be hidden in sleeves and shoes. The capacity of this method is limited, and only weapons from the “Small Weapons” category, and small tools such as lockpicks and poisons with weight and size measurements both less than 1, can be equipped in this manner. Using these items carries no delay as if they were worn on the belt. If the character is searched, the relevant small weapons skill is used to determine whether they’re found. For other items, sneak skills are checked. The weight of all items, from containers and equipped on the body, is combined when regarding strength-based capacity.
Containers would be used for a unique ability of the mark/recall spell effects. A mage could target the effects on any two containers, and be able to exchange items between them. For example, if they cast mark on a small pouch and recall on a large storage container at their home, they would be able to use the pouch to access items in the larger container from anywhere. While an obviously useful ability, the delay of using items from containers still applies, and the target container cannot be used to access any items too large for it to hold, even if they fit in the source container. As well, every item transported in this manner would cost magicka.
I prefer a system like this not for realism (though I'm in favor of that aspect too) but because it has many ways to affect gameplay and create strategy, as well as separating character types. A thief might carry very little, maximizing their speed and mobility by only bringing along vital supplies. Mages might compensate for their frequently low strength with bag-carrying minions, the mark/recall system, using alteration to change the size/weight of luggage, and so on. A fighter might carry several packs, or none, trading heavy armor with little need for other supplies. Merchants could be loaded with bags and followed by pack animals, slow targets but far more able to acquire wealth. Hunters could serve their own needs or make a handy living obtaining tough, rare leather for packs. And so on. As well, while I am guilty of massive pack-rat syndrome, I also enjoy the extra difficulty and strategy that comes with reduced capacity. Do I drop this potion that I know what it is for this thing that I don't? Do I carry the heavy warhammer on my back, not knowing whether I'll need it? It would fit in well with an improved economy too, since I don't feel we should be easily getting rich hauling back the 50 swords retrieved from a dungeon in the first place.
As far as character screen item management goes, I'm fine with Morrowind's system as long as organization is improved. I'm not carrying much heavy weaponry and apparel in the first place, compared to my billions of magical/miscellaneous items, so those separation tabs aren't much help. That's mainly just a matter of better categories and stacking, though.