Q1: What were the key issues with Red Star, Ashmark and their relationship that led to this situation?

Red Star Key Issues:

Inferior Company Leadership - President Barry Louden failed to manage the business at a high level, recognize the warning signs, and proactively deploy a strategy for improvement. He fired his accountant and allowed the company to flounder, displaying no sense of urgency, taking on increasing amounts of debt, and failing to reach out to Ashmark for help until it was too late.

Lack of Transparency - Because RS was a private company and did not volunteer information about its profitability and health, it was difficult for Ashmark to anticipate problems.

Ashmark Key Issues:

Failure to Properly Nurture Relationship with RS - Ashmark should have communicated closely with RS, its strategic partner, to (A) build the relationship, (B) stress the importance of mutual success, (C) seek feedback for improvement, and (D) ensure that RS was content and healthy. Had Ashmark nurtured a mutually beneficial relationship, RS’s failure likely could have been avoided.

Misaligned Incentives & No Challenge Process for Major Decisions - Two examples illustrating how Ashmark’s framework leads to suboptimal decisions regarding its suppliers are as follows:
In order to receive his performance bonus, a previous supply chain manager for Ashmark negotiated significant price decreases with RS; because Ashmark represented 90% of Red Star’s business, RS had virtually no negotiating power and was forced to comply with the request for price decrease, effectively diminishing their margins and putting undue financial stress on the company. Ashmark failed to incentivize beneficial behavior in this instance.
Ashmark sourced several of its higher-volume products away from Red Star to other suppliers in low-cost countries, leaving Red Star with a higher mix of