Mel Pardue has explained this to me a few times...
He mills out the inlay area all the way through the liner (or whatever) Then uses a material called "Cerosafe" available from brownells...it has a melting point of 140, and does not shrink or expand...then you use a CNC-NC end mill (has to be cnc-nc because the shank size is exact), and use the cerosafe casting you just made, put that on top of the inlay material. Then mill around the material keeping the cerosafe casting riding on the shaft, and the cutter on the material, you mill it out...That will give you a perfect inlay.