The .125 would go in the Gauge Block Height DRO on the Offsets screen in Mach3, to make a manual LED touch plate all you need is a simple circuit of battery, LED, clip, and an insulated plate like some circuit PCB.
The clip would go to the tool, then the LED then battery then PCB - touch the tool to the pcb and the circuit is complete and LED will light up. It will not be as accurate as connecting to the BOB though, which is usually very simple if you have a spare input.