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A blacksmith can make new tools. Citizens need tools to do any work other than carrying goods from place to place.
If a citizen doesn't have a tool, they will work much slower and resource production will be severely limited. The more work that is done with a tool, the faster it will wear out and need replacing.
When the blacksmith is low on the materials needed to make tools, he or she will travel to the nearest stock pile that has them and bring them back to the building. The blacksmith will then craft tools.
After the tools have been made, the blacksmith or a general laborer will pick up the tools and store them in the nearest storage barn.