A "fly in the ointment" is a small problem or defect that spoils something desirable.
The phrase probably comes from Ecclesiastes 10:1 in the Bible: Dead flies cause the ointment of the apothecary to send forth a stinking savour: so doth a little folly him that is in reputation for wisdom and honour.
The phrase seems out of place here, and for good reason. The original line was, "N____r Island, eh? There's a n____r in the woodpile" (Sanders and Lovallo, 182). The meaning is similar but the pun is lost.