Sounds good to me. There are tons of posts on forum where players don't understand the complicated "hold-left-click, go to inventory, click the knife" thing. I had this question when I first played the game, so it can be confusing to new players,
and it is just more clicking to people that already know how to do it. "Use on" mode sounds fine, and it will make it easier to everyone. (And the old option would still be available, like how you can mine ore with sledge in inventory using same method)