I'd say that building up the capability of making on-orbit repairs and simple construction work is one of the best (and least controversial) ways of making ISS useful. The proposition that science can be done usefully and economically aboard ISS is still controversial, but I'd think that the economics of doing some practical hands-on work up there should be easier to demonstrate.

How small could the machines be? Quite small. I had in mind the sort of machines made by Dremel that have been popular with model-builders and home handymen for decades. Start with those concepts, maybe add NASA-esque elaborations like computer-controlled robot arms wielding grinders and cutters to fab larger pieces, and voila!, miniature machine shop that fits inside one small module.

One problem I may have glossed over is storage of raw materials. That could get bulky, but then, most materials wouldn't need pressurized storage and could be tethered outside. Another consideration is that, while you could tightly pack a pallet of raw material in sheet and rod form for delivery to orbit, once you start cutting out odd shapes you might end up needing more storage volume to accommodate scraps and leftovers.

Other problems: Dust, toxic fumes from friction-heated material, fasteners and adhesives...this won't be as simple as I might have implied in my initial enthusiasm!

It's going to be true for a long time to come that the essential parts of spacecraft will have to be built on Earth: "air"frame and pressure vessel, engines, avionics and electronics, scientific instruments, optics, and so on. But it also seems to me that there are less-critical items that could be installed on-orbit, like interior furnishings and standardized electronics packages. Imagine the ISS the center of a junkyard of returned spacecraft which could be cannibablized to outfit newer spacecraft with non-critical parts. What if Mir had been parked alongside ISS instead of de-orbited? What a cornucopia of useful junk it would've made! The cost of the stuff you need in space is mostly transportation, and there ought to be compelling economic benefits to building up a recycling capability in orbit.

I'm sure that there's a myriad of holes in the idea that the experts will point out. But I think the basic concept's sound, just needs better execution than I can describe.