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Most likely reason being it's unprofitable to work (outgoing product too cheap).
Unless it's a mod issue. Workshops being "bugged" is nowhere near as prevalent an issue as some would have you believe.
It is still a fairly prevalent issue though, I am playing on 1.2 beta and had an issue with workshops not producing that turned out to be a bug.
It says its becose its no profit, there must be if your the only smithy on that big area.
It just means that there is too much cheap Tools in the town.
Buy out the town stock, or most of it, and see what happens.