What you need to do is go and adjust the cache values downwards.
In my case, I'm on Windows XP and Win2K, and I use VLC's wxwindows interface (I believe it works on other platforms, too).
I've been using VLC's "default" Transcoding -- MPEG4. Haven't had time/urge to try the others. (It looks like the developers are doing good work in MPEG, poking at ALC/H.264 code)
Launch VLC, go into Settings -- Preferences. There's an Advanced Options checkbox in the lower right part of the screen -- select it.
Then, just go through the various sections available on the frame to the left. In the Modules -- Access area, you will see cache values for almost all items -- I knocked them all down to 60 ms. 60 ms is not yet optimized for my work, but our test platform was away for a few weeks, just came back -- I'm doing things with a 36x telephoto, where I need to allow manual pan/tilt/zoom/focus, so I am also working towards < 200 ms implementation.
If you want to try MPEG4, open Modules -- Decoder -- ffmpeg.
Modules -- Demux and Demux2 gets you to more cache values, at least if you are in Windows -- dshow has a DirectShow cache value.
Modules -- sout access, and sout mux have access_output and mux_ts caches.
There's a bit of a writeup at:
http://www.via.ecp.fr/via/ml/vlc-devel/ ... 00061.html
I believe the user interface has progressed a fair amount since the writeup was created.
Good luck!