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Inventory and item management are just stupid in this game, try to ignore them, they are not THAT bad.
Crafting/smithing is just underdeveloped and silly-designed, but despite that, its a very useful tool that can help you become overpowered.
Unlike what you would expect, for the most part, the useful items you can make are consumables.
The rest of the crafting/smithing advantage lies in improving and upgrading your equipment, not in creating fancy new stuff.