Even with lot of control points like Providing red box with lock and key for each CNC machines, identifying rejected parts with red paint mark, clearing rejections shift-wise, regular cautions, alerts, ete setting piece / rejection piece mix-up is still remains a great problem in many of the manufacturing industries. Is there any fool proof system that can help in over coming this issue. pl. advise

I have not seen such a challenge once prevention controls were put in place. If I could observe the work stations where mixups were a problem, I might be better positioned to make advice; after all, a single approach will not suit everyone.

That said, I have a question: have these places used 5S principles to organize their CNC stations?

I agree with your point on 5S principle, see but this is discipline orianted and may not be uniform in all small scale industries where the operators attrition rete would be more especially in our country.
On the otherhand, setting piece rejection is inevitable in the process and process controls can help only during ongoing process.
Just i request what is the practice being followed in similar type of CNC industries