Originally Posted by jay_bob

Yes they work surprisingly well. This was the last generation of the 123 and they used a system that used an analog to digital converter to create two digital values for the set speed and the actual speed. They did a numeric comparison to create the error value to know how much correction to send to the servo. Pretty fancy for the early 80s. Most cars of that day were just doing it in the analog realm, comparing stored quantities of charge in capacitors. This was not very accurate as the capacitors tended to discharge over time.

A couple things:
Make sure your speedometer is running smoothly. The actual speed value is derived from a Hall effect sensor on the back of the speedometer. Also this value is stored when you "set" the cruise control, and used as the "reference" to compare against further "actual" values as you travel along. If your speedometer cable is sticking, it will create a jumpy speedometer. Garbage in = garbage out.

Make sure the linkage from the actuator (the big thing that is on the front of the valve cover that says BOSCH on it) is secure and if you move the linkage manually (with the engine off!) that it moves smoothly and replicates the same motion as if someone steps on the pedal inside.

You can do some electrical testing on the amplifier (located immediately above the brake pedal under the dash). I wrote this for my 124 but the 123 is very similar. The only real difference is that the 123 actuator solenoid does not have a diode, so you will read continuity equally well in both directions when you get to that step.
http://www.peachparts.com/shopforum/diesel-discussion/339362-fixed-cruise-control-87-300td.html