Formatting a USB Drive for use on Windows with FAT/exFat
You're trying to format the volume, not the entire drive.
This isn't obvious, as Apple chooses to present the user with only a volume view by default.
View menu > Show all Devices or Cmd ⌘ 2 will switch to device view, from where it all becomes more apparent.
You then choose the device itself, rather than any of the volumes/partitions on it & all the format options will be open to you.
Make sure to also select Scheme: MBR for best compatibility with other devices/OSes.