Making stone arrow heads requires one to hold the stone in the inventory that's used for grinding the heads. Rocks on the ground prompts "you use a rock nearby" but stone asks you to choose one in your inventory.
Grinding flour lets characters use stones on the "nearby".
Ah, indeed. Seems like this is because the number of heads to make can be chosen by the player, but the number of stones required (even though we'd assume one of course) isn't clear for the game, as it's not specificied. Fixed the requirements now, and to tweak diy_glossary.txt by oneself one can change the stone requirement for stone arrows like this:
{Stone} (1) '+(for grinding)' [noquality]
[Fixed - persists in 3.80]