A fairly nifty way of going about doing something like this is to make a chipset-based menu (or picture based if you're pro), and then have a simple event for every choice such as "To create/upgrade this item, you must possess a -mithril ore- and -iron sword- to create -mithril sword-." and then give the player a choice. If they choose yes, then have the event check (via conditional branches) if the player has all these items, and if not, perhaps add in a "You still require # (ingredient)/s to make this item." by use of variables or just a conditional branch/remove item combo, adding the items back to the inventory after this check. And then just put this in your game where it works like a common event, something you call whenever you reference a blacksmith. By either changing the hero graphic to a cursor, or just removing the party and then adding in the cursor, that should be all you need.
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