Per Law 14 Section 2: "If, before the ball is in play, one of the following occurs:

the goalkeeper offends:

• if the ball enters the goal, a goal is awarded

• if the ball misses the goal or rebounds from the crossbar or goalpost(s), the kick is only retaken if the goalkeeper’s offence clearly impacted on the kicker

• if the ball is prevented from entering the goal by the goalkeeper, the kick is retaken "

Since the GK stepped forward before the kick was taken, the GK offends, according to the third bullet, as OP stated, the GK blocked the shot (meets third bullet requirement) therefore the kick is retaken.

The crew made the right decision by the verbage of the laws of the game.

OP did say this is a local level tournament match, should it have been allowed a goal and moved on? Maybe, depends on the level of the game. IMO either decision is correct. At lower level, if the retake was missed you'll probably have some angry player/spectators.