I am trying to do fault classification/identification and I need to know whether it is possible to do the classification using system output?

In the first step, system outputs are used for parameter estimation of system critical parameters. system a nonlinear reaction wheel model by Bialke. In the second step, I am trying to use clustering algorithms to classify different faults based on their region of operation. However, my supervisor is insisting that classifying faults based on system parameters (estimated parameters from system outputs) is redundant and has no value. He says that using system outputs only, one should be able to classify faults and rank their importance to system failure. 

I was wondering if someone has worked in this area and could help me find some sources in this regard.

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